cuts to include further subsidies. i have already mentioned that the tax wedge in germany, which increased noticeably in the 1990s, poses a considerable impediment to growth. as well as relieving the burden of social security contributions, tax policy2, in particular, is faced with the task of lowering the high marginal tax rates in order to improve the incentives for labour supply, labour demand and capital formation. to achieve this, fiscal policy must likewise have a clear strategy and objectives, something which - to put it tactfully - has not always been in evidence in recent times. an extensive simplification of tax law would take us a big step forward. the widening of the tax assessment base associated with the abolition of current tax loopholes could be used to lower tax rates further. moreover, in the context of a comprehensive income tax reform, consideration could also be given to a further shift from direct to indirect taxes by abolishing current turnover tax reductions. a deterioration of investment conditions must concurrently be avoided, not least in view of the current weak growth and low fixed - capital formation. to this end, a reintroduction of the wealth tax must be rejected once and for all and the envisaged restriction of the facility for offsetting corporate losses against taxes must be abandoned. i am also sceptical of attempts to reform or even extend the existing local business tax. it would appear far more advisable to me - also with a view to simplifying the tax system - to abolish it and replace it by an add - on facility on income and corporation tax for local governments. as regards the taxation of investment income, the proposed tax amnesty could help to broaden the domestic tax base on a lasting basis through the repatriation of exiled money. however, in order to achieve this, a reliable perspective for the future taxation of investment income is particularly important. in this context the definition of a final tax rate would appear to be the right move. the social security system, which was characterised by a sharp increase in the contribution rate in the 1990s, from 35½ % in 1990 to over 41 % in 2000, are also in urgent need of reform. this is particularly essential because the social security systems in their current form cannot cope with the demographic developments. while relief can perhaps be expected for the unemployment insurance fund, provided there is a considerable reduction in the high level of unemployment, the pension insurance scheme, the health insurance fund and the long - term care insurance scheme

available in this area. further measures, such as reducing social security benefits for the unemployed, are under way and under currently being discussed in parliament. altogether this should undoubtedly improve the effectiveness of the labour market. however, the provision specifying that it is only reasonable to expect people to work for the actual local rates of pay would weaken the incentive to take up work. moreover, further measures to make the labour market more efficient seem necessary. for example, consideration should be given to extending the favourability principle ( gunstigkeitsprinzip ) to include the safeguarding of jobs. in future, it should generally be possible, in the interest of employees, to agree on a pay level below the collectively negotiated rates if the very existence of the enterprise is in jeopardy. similarly, employment protection legislation, which in its current form benefits those currently employed, but simultaneously increases the duration of unemployment, needs to be re - examined. not least, the tax wedge on the labour market must be reduced. the wedge between the employer ’ s labour costs and the employee ’ s take - home pay in the form of social security contributions and wage tax rose from 43 % in 1991 to 48½ % in 1997. while it is true that the burden of taxes and social security contributions eased slightly to 47½ % in 2002, there is no doubt that the considerable rise in non - wage labour costs since reunification has had a negative effect on labour demand. in recent years employers and trade unions have agreed on a number of measures to increase flexibility on the labour market with regard to working hours and wages. these include the working hours accounts introduced in many sectors of the economy. they make it possible to adjust the regular working hours more effectively to the needs of the business without payment of overtime bonuses. moreover, in many sectors it is possible to reduce or increase the weekly working hours within certain limits. there is now not only a greater degree of flexibility with regard to working hours, but also wages. remuneration corridors in the chemical industry mean it is possible to lower employees ’ earnings in an enterprise for a limited period to below the collectively negotiated rates. the relaxation clauses for the thirteenth monthly salary in the chemical industry, the private banking sector and recently also in the construction sector are another example of increasing flexibility within industry - wide wage agreements. equally important issues are sufficient wage flexibility and wage differentiation, particularly for unskilled workers. however, hardly any progress worth mentioning has been achieved in this regard in recent years. to