German taxes and energy

Watch Germany.

Europe's industrial leader looks set to sacrifice work to environmentalism. It thus will blaze a trail for similarly inclined governments in Europe and elsewhere.

The trail heads nowhere Germans-or anyone else-should want to go. It might indeed point to diminishing consumption of energy. It thus might even mean a reduction in pollution from the combustion of hydrocarbons. Environmentalists will find these outcomes pleasing.

Yet reduced rates of energy consumption will impose a cost: contraction of total work performed in the German economy. In a country suffering unemployment ranging from nearly 10% in the west to 18% in the east, this hardly represents progress.

New government

The new coalition government headed by Chancellor Gerhard Schr?der takes a different view. Its finance minister, Oskar Lafontaine, loves taxes. Lafontaine heads Schr?der's Social Democratic Party, which won the right to form a government last September. Before then, Lafontaine marshaled Social Democrats in the second house of parliament, the Bundesrat, to stymie all efforts by the former government to cut top tax rates, an essential element of German reform.

Now, less than 2 months in power, the Social Democrats and environmentalist Greens, their coalition partners, have moved to act on their most destructive urges. Taxes in Germany's heavily taxed economy will rise-especially energy taxes.

The new government proposed that gasoline taxes jump by 16¢/gal effective Jan. 1 (OGJ, Nov. 2, 1998, Newsletter). Later, taxes will rise on natural gas, heating oil, and electricity. The increases appear in a tax reform package that eases the burden on low and middle-income taxpayers and adds to the load on industry. At the same time, the government wants to close all nuclear power plants, which provide one third of Germany's electricity.

Energy wasn't cheap in Germany when this process began. Soon, if the initiative survives resistance by German businesses and individual consumers, the federal republic will make energy used within its borders very expensive, even by European standards.

Here, then, is a test case for the world.

Environmentalists regularly deny that their "clean-energy" agenda hurts economies. They insist that the money people make by building giant propeller blades and solar panels and by selling electricity generated from wind and sunlight compensates for losses in other economic sectors. They argue that quantum increases in the cost of energy so produced subside in the context of diminished environmental costs not captured by traditional accounting. And they promise that people benefit on balance.

Now the world will see.

The export-heavy German economy was growing when the Social Democrats took power. It was lop-sided growth, to be sure. A slump in value of the German mark had stimulated exports, but high taxes and the high cost of German labor had diverted investment away from the country. Thanks to perverse incentives in fiscal policy, tax receipts didn't grow as fast as the economy.

Under those conditions, a hike in energy costs will only discourage work and investment, intensify the demands on Germany's lavish welfare system, and chase more cash out of the country. Soon, the Social Democrats will want to raise tax rates again for social purposes, which will speed the noxious reaction. Yet support from the Greens will provide political cover as long as German voters think they need to sacrifice wealth to other people's notions about how much energy they should use. On balance, Germans will suffer.

Evangelizing folly

So watch Germany. Watch how the urge to tax blends with aversion to energy to weaken a once-mighty economy. Then watch Social Democrats evangelize their folly to trading partners in the name of the environment, which of course knows no frontier.

And when anyone offers a sip from this golden chalice filled with economic swill, just say no.

Copyright 1998 Oil & Gas Journal. All Rights Reserved.