Just two months after it was narrowly re-elected, the German Government's tax policy is in some disarray.

In corporate taxation, Germany and France have decided to push for Europe-wide harmonisation, according to reports in the Financial Times.

At the same time, however, there is a growing row over new German laws, which propose charging twice as much capital gains tax to foreign investors as their domestic rivals.

As regards personal taxation, the government is the focus of increasing public criticism, as it becomes clear that taxes will have to rise to plug holes in the state budget.

As a mass of lobby groups argue that they should be exempted from any increase in the tax burden, the government has already slipped 22 percentage points behind the opposition in the latest opinion poll.

Preach and practise

The notion of harmonising corporate and value-added tax across the European Union has long been an aim of federally-minded politicians.

Mr Schroeder has slumped in the polls since September

Now Germany and France are planning to make the aim a reality, and will unveil a joint scheme to that end before Christmas, the FT said.

This is likely to prove highly controversial among opponents of a more centralised Europe, notably the UK, which favours retaining national sovereignty over tax policy.

Many smaller EU countries - including many among the 10 countries likely to join in 2004 - have used low tax as a way of attracting investment, and would resent any restrictions from Brussels.

Fund fracas

Even more controversially, Germany is practising tax discrimination at the same time as preaching uniformity.

A coalition of fund managers is preparing to launch a campaign against plans to charge foreign firms twice as much capital-gains tax, a move they say would destroy Frankfurt as a financial centre.

It would also, the managers argue, sharply contract the market for mutual funds or unit trusts, a type of investment that has boomed in Germany in recent years.

The idea - its critics say - runs counter to the EU's single-market rules, which insist that Europe should operate a level playing field for investment.

Panic stations

Even more worrying for the government is the growing popular outcry about the rising tax burden.

Mr Eichel needs to make sweeping cuts

There is still no concrete information on which taxes will rise, fuelling frenzied rumour in the German press.

The government, meanwhile, has handled the topic clumsily, its critics say.

Franz Muentefering, a leading member of Chancellor Gerhard Schroeder's Social Democratic Party, argued on Monday that Germans should give their spare money to state, rather than spending it on themselves.

Reports that cuts in health-care coverage could be on the way have already sparked protests in Berlin.

Crucial cuts

In the meantime, Germany's budget position is worsening.

A senior Bundesbank official was quoted on Monday as admitting that its state budget deficit would exceed 3% of annual economic output - the maximum allowed under EU rules - next year as well as this.

Pedro Solbes, the European commissioner for economic affairs, warned at the weekend that political pressure might water down plans to tackle the deficit, which the government officially hopes to cut to 2.75% in 2003.

Economists urge Finance Minister Hans Eichel to reduce some of the lavish sums the government effectively spends on subsidies and tax loopholes.

But withdrawal of such much-appreciated largesse will prove unpopular, and some doubt that the government has the stomach for such a move.