Less taxes for all – an empty promise?

Conservatives like Luc Frieden are trying to promote failed policies as new. Why this is the wrong way to go.

When change is on the horizon, there are those who try to shape the future with innovative ideas and try out new approaches. And then there are those who want to meet the great challenges of our time with answers from the past.

Conservative as well as liberal politicians all over Europe are currently trying to put forward the thesis that we just have to give more room to the market and that the state should interfere as little as possible in the economy. Only then could our economy develop positively.

This was the case, for example, with British Prime Minister Liz Truss. With her ultra-liberal course, she lasted just 50 days in office after the announcement by her finance minister of a massive tax cuts. The idea: less taxes bring more growth, which in turn leads to more tax revenues. Theoretically, a win-win. But the markets reacted with shock, among other things because the tax cuts were to be financed by debt, the pound plummeted and interest rates rose. As a result, the tax cuts were largely cancelled and Truss resigned.

While Truss pushed it too far, other politicians act more cleverly. Always according to the old narrative: less taxes, more growth.

The “new” Luc Frieden

In Luxembourg, too, this old narrative is being served up again. Earlier this week, the CSV’s top candidate and ex-finance minister, Luc Frieden, was on every news channel to present the party’s priorities for the parliamentary elections in October.

Again, the main demand is to cut taxes for everyone, with the aim of generating more growth – in contrast to the current government, which, according to him, only raised taxes. At the same time, the debt burden should remain at 30% of GDP.

On the one hand, the claim that taxes have only increased in the last two legislative periods do not reflect reality. Through the 2017 tax reform, the recently decided adjustment of the tax scale on 1 January 2024 and other selective measures such as the increase of the tax credit for single parents, the current government has provided tax relief for the vast majority of households.

On the other hand, the question arises as to how Frieden’s calculation is supposed to add up. If taxes are to be cut across the board, but the national debt rate is to remain stable and no counter-financing is envisaged, there is really only one possibility: reduce expenditures at the state level, which would probably primarily affect investments.

Continue high investment

However, it is precisely now that we need more public investment in order to implement the Mobility Plan 2035 and thus set up the mobility infrastructure in such a way that everyone can move from A to B easily and quickly. The same applies to the housing crisis, where the massive increase in investment in affordable housing must continue in the coming years.

In the same way, the state is also needed to proactively support citizens and businesses financially in switching to renewable energy and to ensure a health system that guarantees everyone quick and reliable access to medical care. These investments are also crucial to increase Luxembourg’s competitiveness.

Also, the argument that more growth will solve the problem of funding is at least questionable. Significantly more growth would mean that the negative consequences of growth, such as increased demand for housing, increased traffic, as well as increased pressure on our environment, would increase even more than is the case already. This in turn would require even greater investment in infrastructure – investment that was neglected under CSV Finance Minister Frieden before 2013 and only noticeably redirected and increased in recent years. So it is not without a certain irony that the ex-finance minister Frieden is now accusing the current government of having failed to act on the housing crisis, the shift in mobility and climate protection, and is promising to solve these issues with recipes that have already failed.

Setting the right priorities

Instead of fiscal populism, we need a truly sustainable tax and fiscal policy that sets the right priorities. This means, for example, no general tax giveaways for everyone, but rather tax relief for those citizens who are affected by rising costs of living, above all people with low incomes and the middle class. The major tax reform, which could not be implemented in this legislature, must therefore be given top priority in the next government. This also means overcoming the tax class 1A inherited from previous governments by individualising income tax, and thus creating more justice for single parents and widows or widowers.

Equally, it also means ensuring a tax policy framework that makes climate and environmental protection financially worthwhile. For example, in one of the last tripartite negotiations, a tax incentive was announced for companies that make their activities more climate-friendly. Almost 10 months later, however, there is still no legislative proposal from the Ministry of Finance or the Ministry of Economy. This measure should now be implemented as soon as possible and it must be ensured that only truly sustainable investments are favoured. In addition to the existing premiums, private households should also receive tax support if they make climate-friendly investments, e.g. through an additional deduction for home savings contracts that are used for renovations in terms of energy efficiency.

Finally, we also need targeted support for young people who are at the beginning of their professional careers or who want to become entrepreneurs, e.g. by providing fiscal benefits for young people starting their careers in terms of housing expenses and investments in new businesses.

In the coming years, it is thus important to find new ways and set the right priorities instead of pretending to be able to solve the current issues with failed policies from the past.

First publication: Luxemburger Wort, 24.06.2023 (in German)

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