Edward DP Situmorang
KIEL – Moritz Schularick, President of the Kiel Institute for the World Economy (IfW Kiel), has sent shockwaves through Germany's economic landscape in 2026. He proposes radical reforms: a significant increase in Value Added Tax (VAT) from 19 percent to 22 percent and the abolition of dismissal protection, with the primary goal of alleviating the income tax burden on citizens. This controversial proposal comes in response to the federal government's tax reforms, which he deems 'cowardly' (mutlos).
Schularick candidly stated that the current government's tax reform package is too cautious and lacks the courage to address Germany's structural economic challenges. According to him, the federal government's approach tends to limit itself to short-term solutions without touching the core issues that could hinder long-term growth.
The proposed VAT increase of three percentage points to 22 percent aims to create significant fiscal space. This additional revenue, Schularick argues, could be used to substantially cut income taxes, providing a direct stimulus to consumer purchasing power and the business sector.
Beyond the VAT hike, the most controversial element of his proposal is the abolition of dismissal protection. This measure, according to Schularick, would enhance the flexibility of the German labor market, making it easier for companies to adapt to fluctuating economic conditions, and fostering innovation and new job creation.
Greater labor market flexibility is considered essential amidst increasingly fierce global competition. Proponents of this move argue that by removing dismissal barriers, companies would be more willing to hire new employees, knowing they have the ability to adjust if market conditions change.
However, the idea of abolishing dismissal protection is certain to trigger a wave of protests from trade unions and opposition parties. They fear that this step would harm employees, create widespread job insecurity, and potentially increase social inequality in the country.
On the other hand, Germany's economy indeed faces severe pressure. Recent data indicate slowing growth, persistent inflation, and challenges in the energy sector. Several reports, such as those related to the drying Rhine River affecting supply chains, indicate that Europe's largest economy requires strategic intervention.
Schularick believes that without bold reforms, Germany risks losing its competitive edge in the global economy. He is convinced that temporary solutions will only postpone larger problems, and it is time for the government to make tough decisions for a more stable future.
Debate on this proposal is expected to be heated in the Bundestag and across German society. Political parties, academics, labor unions, and business associations will have widely divergent views on the positive and negative impacts of IfW Kiel's radical proposition.
Editorial Insight:
Moritz Schularick's proposal is a direct challenge to the narrative of incremental economic reform. By combining a VAT increase with the abolition of dismissal protection, he confronts the status quo and forces a discussion about the sacrifices needed for fiscal stability and competitiveness. The audacity of this proposal may ignite intense political polarization but also opens the door for constructive debate on how Germany can navigate the economic challenges of the 21st century. The German Federal Government under Chancellor Olaf Scholz now stands at a crossroads, facing a difficult choice between short-term political consensus and potentially painful long-term structural reforms.
