German tax cut row worsens ahead of EU summit

BERLIN Sat Oct 22, 2011 10:34am EDT

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BERLIN Oct 22 (Reuters) - A festering dispute in Angela Merkel's centre-right coalition worsened on Saturday when the chancellor publicly rejected a claim by one of her junior coalition partners that a tax cut proposal had been scrapped.

Merkel said in a speech in Wiesbaden on Saturday that the centre-right government was still aiming to cut taxes by 6 or 7 billion euros in 2013, ahead of the next federal election, even though the Christian Social Union (CSU) allies oppose it.

"There's no way that the plan has been taken off the table," Merkel said, referring to the announcement on Thursday by Finance Minister Wolfgang Schaeuble and Economy Minister Philipp Roesler to cut taxes in 2013.

Without the support of the CSU, which shares power with Merkel's Christian Democrats (CDU) and Roesler's Free Democrats (FDP), the tax cut proposal has no chance of succeeding.

CSU leader Horst Seehofer has rejected the tax cut plan.

The three party leaders met in Berlin on Friday evening to try to iron out their differences but failed to reach an agreement -- other than postponing a decision until Nov. 6.

There were also conflicting reports on Saturday about what happened at the meeting as leaked to Reuters and other news outlets.

In an unprecedented move, Roesler even retracted a comment he made in a newspaper interview with Bild am Sonntag to be published on Sunday. An advance of the interview was released on Saturday.

At first Roesler said Merkel "accepted the blame for the blunder about the coordination with Seehofer." But Bild am Sonntag later said Roesler had withdrawn the word "blunder" and replaced it with "misunderstanding".

The messy dispute, drawing ridicule from the opposition that has dubbed Merkel's government the "chaos coalition", comes at a difficult moment for the chancellor ahead of crucial meetings on the euro zone crisis on Sunday and Wednesday.

Even though the amount in question -- 6 or 7 billion euros in 2013 -- is relatively small compared with the sums at stake in the euro zone rescue, media latched onto the unusually public row as a sign of the coalition's demise amid sagging support.

Sources close to Merkel dismissed on Saturday reports she had apologised to Seehofer that emerged from CSU and FDP camps for not informing him of the Schaeuble/Roesler tax cut plan.

"There was no 'blunder' and there was no apology," one source told Reuters. The tax cut proposal announced by Schaeuble and Roesler was a conscience move "to open the door for a broader discussion about tax cuts for the public."

Seehofer was annoyed and only learned of their foray on tax cuts from media reports. "It doesn't work like that, presenting facts in the public and expecting us to rubber stamp them," Seehofer said. "That's just not on."

After long opposing tax cuts demanded by Roesler's FDP, Schaeuble appeared at the Economy Minister's side to announce the 6- billion to 7-billion euro tax cuts in 2013. German media speculated that Schaeuble had caved in to win their backing for measures to bolster the euro zone rescue fund.

Schaeuble and Roesler want to cut taxes by reducing the so-called "cold progression", or "bracket creep", in Germany's tax code that generates billions of euros in revenues for the treasury because tax brackets are not adjusted for inflation.

The system has not been changed since 1958 and the state took in an extra 76 billion euros from 2005 to 2010. It has been taking in about 22 billion euros a year from 2010.

But Seehofer and his Bavarian CSU oppose those plans, saying there are other ways to reduce revenue that would not require approval from the upper house, or Bundesrat, where the centre-right coalition has no majority.

The opposition SPD, who rule the key states of North Rhine-Westphalia and Baden-Wuerttemberg, have already said the Roesler/Schaeuble tax cut plan has no chance.

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