By Alexandra Hudson
BERLIN (Reuters) - Angela Merkel will be asked to break an election pledge not to raise taxes in talks this week on a 'grand coalition' with the opposition Social Democrats (SPD) which could also threaten her influential finance minister.
The chancellor's conservatives notched up their best result in more than two decades in last Sunday's election but fell just short of a parliamentary majority, leaving Merkel in need of a partner. Her former allies, the Free Democrats (FDP), lacked enough support to return to parliament.
While she also has the option of talking to the Greens, both Merkel and the German public prefer a repeat of her 2005-2009 right-center alliance with the SPD. Yet it appears both sides are headed for a bruising showdown over tax.
Leading conservatives stressed over the weekend the party would stand by its pledge not to increase taxes. The SPD by contrast made tax increases to fund infrastructure and education a key part of its campaign platform.
"I have talked to the chancellor and can say on her behalf: with us there will be no tax increases. That is why we got the election result we did, and that is how things will stay," senior CDU lawmaker Volker Kauder said on Sunday night.
Horst Seehofer, leader of Merkel's allies in Bavaria the Christian Social Union (CSU) told Bild am Sonntag newspaper: "I give citizens my word ... We have a record high tax intake and the state must make do with what it has. That is why tax increases are out of the question for my party."
Both sides will have to give some ground, but the SPD is particularly wary of governing with Merkel because it fears appearing a nonentity besides the popular chancellor - and hence will demand substantial concessions from her to boost its profile.
The party's decision on Friday to put any decision on whether to enter a grand coalition to a poll of their 472,000 grassroots members only heightens the pressure on Merkel to come up with a palatable offer.
Yet Merkel is emerging from an election which gave her party its best result for two decades and left it just five seats short of the first absolute majority in Germany in more than half a century.
ROB THE RICH?
News magazines Focus and Spiegel both portrayed Merkel and SPD chairman Sigmar Gabriel on their covers in robber masks amid speculation of tax hikes.
Spiegel also reported that Finance Minister Wolfgang Schaeuble had already asked experts to draw up plans on raising the top tax rate - currently at 45 percent on income over 250,000 euros - to between 46 and 48 percent. His ministry dismissed the report.
In an interview last week, however, Schaeuble refused to rule out tax hikes.
The SPD has said it would lift tax rates on incomes above 100,000 euros to 49 from 42 percent. The party also wants a minimum wage of 8.5 euros, whereas Merkel only supports minimum wages specific to sectors in each region.
Control of ministries will be another focus of negotiation. The SPD wants six posts in Merkel's future cabinet, among them the role of finance minister, German media reported on Sunday. That would mean Merkel having to relinquish Schaeuble, finance minister since 2009 and one of the most influential and respected players through the euro zone crisis.
Claiming the finance ministry would allow the SPD to stamp its mark on euro zone policy, seizing some limelight. But a poll this week showed almost three out of four Germans want Schaeuble to stay at the ministry and there are a number of scenarios that would let him keep the role.
A major risk for the SPD is that their members reject a grand coalition, a move that would further damage the standing of the party and its leadership - who will have negotiated the deal with Merkel - after a weak election performance.
At a meeting of the SPD's left wing on Saturday, delegates noted it would be difficult to reject a grand coalition if that undermined the party's leadership to the point of making their position untenable.
A fresh election, a highly unlikely option if talks with the SPD or the Greens fail, would also be unlikely to solve Merkel's coalition puzzle, according to an Emnid poll.
It showed the CDU/CSU slightly bettering last week's result to stand at 43 percent, the FDP falling to just 3 percent, the SPD and Greens each weakening slightly to 26 percent and 7 percent - but the Eurosceptic Alternative for Germany (AfD) entering parliament for the first time, and so denying Merkel an absolute majority.
(Reporting by Alexandra Hudson; editing by Patrick Graham)