Coalition Unites On Key Tax Initiatives For Second German Stimulus Package

by Ulrika Lomas, Tax-News.com, Brussels

14 January 2009

The German government was due on Tuesday to unveil its second economic stimulus package, worth in the region of EUR50bn, and containing far-reaching investment initiatives as well as dramatic cuts in tax and social security contributions.

Following months of political wrangling, and an intensive meeting early this week, Germany’s Coalition government has finally united on one of the most comprehensive economic packages in post-war history. Indeed, as leader of the Social Democratic Party (SPD) Peter Struck announced: "it is a good day for Germany."

The corner stones of the fiscal stimulus package are as follows:

Tax initiatives

The basic tax allowance is set to increase from EUR7,664 to EUR8,004. At the same time, in a bid to alleviate the negative impact of rising taxes on increases in low wages, the entry-level tax rate will also be reduced, from 15% to 14%.

These measures will not only benefit individual taxpayers, but equally the vast majority of German firms who also pay income tax.

Investment

Increased state investment lies at the heart of the economic program. Over the course of the next two years, the German government intends to allocate an additional EUR18bn to investment in infrastructure, two-thirds of which will be invested in training programs, the rest into roads, railways and faster internet access.

Wealth taxes

The proposal to raise the top rate of tax from 45% to 47.5%, put forward by the SPD party as a means of financing investment in training schemes, was rejected by the Union.

Health insurance contributions

The rate of the health insurance contributions will be lowered from 15.5% to 14.9%, benefiting both employers and employees.

One-off child bonus payment

All parents, currently receiving child benefit, will also receive a one-off bonus payment of EUR100 per child. In addition, the standard rate of benefit for children aged between six and thirteen from welfare families, or ‘Hartz-IV-Familien’ will rise from 60% to 70%.

Aid for the car industry

This year, car owners will receive a EUR2,500 scrapping bonus for cars older than nine years, when purchasing a new car. In accordance with SPD stipulations, however, in order to benefit from the initiative, the car must have been owned for at least a year.

Credit guarantees for businesses

With banks reluctant to lend, the Coalition government has agreed to establish a EUR100bn fund to provide credit guarantees for business.

Reduced working hours

With preservation of jobs paramount, the government is eager to make the option of reduced working hours more attractive.

According to Union Chairman Volker Kauder, assuming swift parliamentary approval, the package of measures will enter into force on July 1, 2009.

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