Hopes for a broad-based cut in German taxes are fading ahead of an expected election in September as both leading parties seek ways to raise revenues to plug the country's budgetary holes.
The ruling Social Democrats (SPD) and opposition conservatives are instead grappling with the problem of how to sell voters the unpalatable truth that some taxes are set to increase.
With a budget deficit that has broken EU rules for three years in a row, Chancellor Gerhard Schroeder's SPD has long said there is no room for further fiscal giveaways - a message muddied by a surprise proposal in March to cut Germany's basic rate of corporate tax to 19 per cent from 25 per cent.
SPD sources said on Monday the party was now ready to go further and pledge a new tax on high earners, reversing the policy it has pursued since 2000 in lowering the top rate of income tax to 42 per cent from 53 per cent.
The Greens, the SPD's junior partner in government, said yesterday they also favoured a similar high earners tax. Despite a big lead in opinion polls, talk of a "big" tax reform by the opposition Christian Democrats (CDU) has also faded. Even the SPD's modest corporate tax cut, agreed in principle with the CDU, looks in doubt.
Instead, leading CDU figures are arguing about how much value added tax (VAT) should increase and what the party should say about that - if anything - in its manifesto, due on July 11, a week after the SPD's.
SPD officials have ruled out a hike in VAT in speeches, but their manifesto is expected to keep mum on the matter.
Most analysts believe a VAT increase is inevitable and could actually be positive for the economy if used to fund cuts in social security contributions.
"We can't... cut income tax at will because we need the tax revenues," CDU leader Angela Merkel said on Monday.
Ms Merkel signalled the CDU's new priority was not cutting the entry rate of tax to 12 per cent from 15 per cent and the top rate to 39 per cent - goals set by the party last year - but reforming Germany's complicated system of business taxes.
Less than 20 per cent of German limited liability companies pay corporate tax. The smaller firms that make up 80 per cent of all companies and have a different legal form are assessed under personal income tax rules.
Both the opposition and the SPD want a single tax on companies, independent or "neutral" from the legal form they take.
The CDU's regional barons - many of whose states are deep in debt and need cash quickly - are singing the same tune.
"First we have to simplify the tax system. Separately, we have to think about if and when tax cuts are affordable," Hesse state premier Roland Koch told Handelsblatt newspaper in an interview on Monday.
Baden-Wuerttemberg premier Guenther Oettinger told Spiegel magazine a future CDU-led government's goal should be to reform the tax system from January 1, 2007.
However, such a move is complicated by local business tax levies, which add around 13 to 14 percentage points to limited companies' tax bills on top of basic corporate tax.
Mr Oettinger suggested cutting this Gordian knot would be the CDU's uppermost goal and was worth sacrificing the planned cut in basic corporate tax to achieve.
"If we scrap local business tax and provide the communes with a share of income tax, it would strengthen firms, who could then create jobs," Mr Oettinger said.
"In this case we could do without the cut in corporate tax to 19 per cent...," he added.