German Bundesrat Rejects Tax Cut Plans

by Ulrika Lomas, Tax-News.com, Brussels

14 February 2012

Germany’s black-yellow coalition government has failed to receive support for its tax cut plans in the German Bundesrat, or upper house of parliament, when a bill providing for tax cut measures of around EUR6.1bn (USD8bn) was rejected in a first reading.

Federal states led by the Social-Democrats (SPD) and by the Green Party (Grünen) “massively criticized” the government’s “small tax reform” plans, arguing that the “irresponsible” measures are in direct contradiction to the need for budgetary consolidation, particularly in view of the debt brake rule enshrined in the country’s constitution. There is currently no scope for tax relief, they insisted.

“Tax cuts of today increase the debt of tomorrow”, the finance ministers of the Bundesrat finance committee had argued earlier, before advising the Bundesrat plenary to completely reject the federal cabinet’s bill.

The German cabinet adopted back in December the long-awaited bill providing for an increase in the personal tax allowance and tax brackets in Germany to compensate for the effects of inflation (fiscal drift).

In accordance with government plans, the personal income tax allowance is to progressively rise by a total of EUR350, or 4.4%, by 2014 to EUR8,354 in two stages: by EUR126 from January 1, 2013, and by a further EUR224 from January 1, 2014.

Income tax bands in Germany will also rise by a total of 4.4%.

In future, the black-yellow coalition also plans to examine the effects of fiscal drift every two years to determine whether or not similar adjustments are to be made.

No adjustments have been made to compensate for fiscal drift as regards annual income above EUR250,000 for individuals or in excess of EUR500,000 for married couples, those currently subject to a 45% rate of income tax or so-called “rich tax”.

The Bundestag, Germany’s lower house of parliament, is due to examine the government’s proposed new law at the beginning of March, before the text is finally returned to the Bundesrat for a second reading.

Given such fierce initial reaction from the federal states, it appears unlikely, however, that the bill will be approved, requiring recourse to a mediation committee.

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