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Germany: Tax increase for freelancers

A bill proposing new taxes on freelancers may not help Germany jump-start innovation or its entrepreneurial culture.

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Members of the German Parliament Dec. 12, 2012 in Berlin. If the Bundestag passes the self-employment Social Security tax, tax burdens will rise significantly on millions. (Robert Schlesinger/AFP/Getty Images)

BERLIN, Germany — Giulia Pines Kersthold left the United States to fulfill her dream of living in Europe. She landed in Berlin, famous for its low cost of living, openness and boundless creativity.

But four years later, the 28-year-old writer worries that dream may soon be over — the German government is mulling a mandatory social security tax on the self-employed that could add upwards of 300 euros ($400) a month to her operating costs.

“Part of the reason most people move to Berlin from America, especially from New York City, is that the costs are so much less here,” said Pines Kersthold. “But if you’re suddenly forced to pay an additional 300 euros [a month], you think ‘OK, I’m moving back to New York — what’s the point in actually doing this?’”

Kersthold is part of a growing number of freelancers — including numerous Americans — across Germany. In a country of more than 81 million, only 4.2 million are registered as self-employed, but that number is growing: It has soared by 40 percent over the past two decades.

That’s a trend the German government says it wants to promote, and accelerate.

Over the past few years, Europe's largest economy has tried to find ways to put people to work, especially the young, while diversifying its economy, largely dependent on export-led, mid-sized and large companies. New initiatives to encourage people to start their own businesses have set up advice lines and support programs for would-be entrepreneurs.

The thinking goes: red tape, tight credit and a lack of entrepreneurial culture hinder business creation — and therefore employment and growth.

“Young business founders have a dynamic and an entrepreneurial spirit that we need here in the business hub that is Germany,” said Philipp Roesler, Germany’s economy minister, at a meeting with young startups in August.

“These young businessmen and women represent a decisive part of Germany’s future, driving innovation and growth in large parts of the German economy and creating high quality jobs.”

But that vision is clashing with a need to provide for Germany's expensive pension system. Its costs will grow as the population ages, low birthrates stagnate, full-time employment declines and immigration policies firm up.

With this flat tax proposal, critics say the situation is reaching the absurd — it will undermine the push to create small businesses and increase the numbers of unemployed and underemployed that are already straining the public welfare budgets.

And, they say, it will make a mockery of the recent slogan: "Germany, a land for innovation."

“If politicians want more German innovation, and are always complaining that there is so much coming out of the USA, especially in the web industry, that we’re always running to catch up and that we’re copycats, then they should think about giving people some freedom,” said Tim Wessels, who co-founded an IT support company called Fair + Friendly, with branches in Muenster and Hamburg.

Pay up, people!

In Germany, freelancers in what are deemed specialized professions — including medicine, architecture and law — already pay into private pension funds. Now, Germany’s Labor and Social Affairs Ministry is turning its attention to approximately 3 million self-employed workers who are not required to contribute to a pension scheme — and making sure they pay up.

“The biggest reason for it is that our working environment has changed,” said Christian Westhoff, deputy spokesman at the ministry. “In Germany it’s had the effect that we have more freelancers earning less that are not obligated to put money away for their retirement.”

German media has reported that the government was debating a flat-rate tax between 300 euros and 350 euros ($400 to $457), though ministry officials have disputed that figure. They say no fixed amount has been set because they are still examining existing assets and pension contributions before making any decisions.

Westhoff says the goal is to ensure workers contribute enough money now to secure the minimum pension payment of 700 euros ($915) a month for retirement.

“We’re doing something for the future, for the coming decades,” he said.

Even so, critics say it’s younger generations that would shoulder the burden: Anyone over 50 would be exempt from the tax, with the strictest regulations falling on those under 30.

In Germany, students in universities study longer than in the US, and recent graduates