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Today the exchange rate of DEM dropped below 0,02 gold. This was expected to happen yesterday already, when only a low amount of gold was offered on the market. However, since yesterday people started to ask to lower income taxes on raw materials to 1 % -5 %, to produce more of those commodities in the Union instead of importing them to Germany. In a statement in the forum I already responded on this and said, that I am against this kind of panic changes. The congress is about to lower income taxes from 15% to 12% right now and will decrease taxation of income even more if possible. But as we are not able to predict how much of the tax income is generated by the income tax, I want to avoid ending up with a huge deficit.
The fact that raw material prices are increasing due to the DEM/Gold Exchange rate is obvious, but on the other hand this makes German products more interesting for foreigners as well. In my opinion, and I believe to speak for the entire government, the only way to guarantee a stable DEM/Gold exchange rate is by balanced foreign trade. The industry will produce raw materials in the Union as soon as it will be profitable anyway. Decreasing the income tax on salaries earned in the wood and iron sector would lead land workers to take jobs in those sectors but the grain sector would end up with a lack of work force. As we are high productive in grain only, this would lower our economies efeciency. Producing wood and iron in Germany would mean, that prices for those raw materials would have to stay at a rather high level on our market. Wether we decrease income taxes on them or not, prices for those goods on the world market will always be lower.
To explain this:
The current price of iron on the Unions market is at 0,81 DEM. Decreasing the income tax to 1% would mean, that the iron industrie would be able to decrease its production costs by 14% at maximum (In case they are able to keep all of the tax cut and salaries are not increasing). So if the industry in the Union is yet not able to produce iron at a price of 0,94 DEM they won’t be able to compeet even with a lowered income tax. Same thing with wood. Wood is offered for even less right now (0,72 DEM/quality – q2 wood).
The government, most of congress and myself are aware of the situation, and I literally spent hours a day to look for solutions, but these solutions need to be elaborate, sustainable and workable.