Anger at Kohl plan for 5% unification 'tax'

CHANCELLOR Helmut Kohl's Christian Democratic Party (CDU) set off a furious row yesterday when it advanced proposals to force western German firms and taxpayers either to invest in the struggling east or make an obligatory, interest-free loan to the government.

The plan, devised by the Chancellor's right-hand man, Wolfgang Schauble, and backed by the CDU parliamentary party and its Bavarian sister, the Christian Social Union, foresees a 5 per cent tax on company profits and the income of the better-off.

The proposals provoked indignation from economists worried about the deflationary effects of what would amount to yet higher taxes on an increasingly weak western German economy. The opposition Social Democrats accused the government of preparing another 'great tax lie' to meet the spiralling costs of unification.

Mr Kohl's coalition partners, the liberal Free Democrats, were equally critical, claiming the bond idea violated the constitution. 'It is no way to stimulate investments. It would also have a bad effect on the capital market,' argued the party chairman, Otto Graf Lambsdorf.

In 1984 Mr Kohl had attempted an enforced loan to cure a serious budget deficit inherited from the SPD government, only to have it rejected by the constitutional court. According to Mr Schauble: 'If it is the only way, then we shall have to change the constitution.' A Chancellery source said: 'Everything is being done this time to avoid such a rejection fiasco.'

Dieter Vogel, chief government spokesman, said the cabinet had neither considered the issue of compulsory bonds, nor taken any decisions. 'But the suggestions from the large group in the coalition will, of course, be examined carefully,' he added.

Despite transfers of public funds from west to east, amounting to 180bn marks ( pounds 64.4bn) this year alone, there are few signs of a hoped-for recovery in an eastern Germany plagued by ever-increasing social tensions. Patriotic appeals by Mr Kohl to west German businessmen to invest in the east having met with little enthusiasm, the government is resorting to enforced means to generate the desired flow of private funds. 'Without some sort of obligatory loan the sums won't add up,' said the Building Minister, Irmgard Schwaetzer. A senior Chancellery source said the proposals emanated from a 'serious discussion at the top'.

The clearest details of the 'obligatory loan' came from a senior CDU politician, Ulf Fink, who said it would begin in 1993 and last three years.

The 5 per cent duty on profits would cover all western firms with more than 20 employees who did not invest in the east. It would also apply to all individuals earning more than DM5,000 ( pounds 1,786) a month who had also not purchased the government's special eastern solidarity bonds. The 'loan' would be repaid, without interest, in stages some time after 1996. According to Mr Fink, over DM40bn ( pounds 14.3bn) could be raised. Despite early promises that taxes in the west would not be raised to pay for unification, Mr Kohl's government has imposed extra taxes, duties and insurance contributions totalling DM60bn ( pounds 21.4bn) since early 1991, provoking a dramatic drop in government popularity.

The 'solidarity income tax', which raised DM23bn ( pounds 8.2bn), ended in July, leaving the government casting around for new funds.

'The government needs money, but these hidden tax plans are a sign of desperation,' said Jurgen Pfister, a Commerzbank economist. Such a ploy underlined the 'government's serious failure to cut spending and subsidies in the west'.

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