German Businesses Demand Tax Cuts From New Coalition

by Ulrika Lomas, Tax-News.com, Brussels

01 October 2009

The German elections may have drawn to a close, but the new Coalition already faces a tough battle ahead, as one by one leaders of German business associations begin to clamour for the parties to honour their pre-election pledges to cut taxes.

Election victory for Angela Merkel’s Christian Democratic Union (CDU) party and the pro-business Free Democratic Party (FDP) is bitter sweet. As the two parties begin negotiations, eager to make swift decisions on critical issues such as tax, cracks are already starting to emerge in the relationship – and the pressure is mounting.

Although the Chancellor has yet to form a new government, German business associations are already calling for urgent tax reductions to be implemented, and for spending to be cut radically in order to reduce spiralling state debt.

In a recent statement, President of the German Employers’ Federation (die Bundesvereinigung der Deutschen Arbeitgeberverbände – BDA) Dieter Hundt emphasised the importance of reforming the country’s current tax system in a bid to create a simpler and fairer system, and of significantly reducing taxes and contributions for businesses.

According to Hundt, the government’s top priority must be to ensure liquidity for all businesses in Germany to avoid a nationwide credit crunch. Under no circumstance should new taxes or contributions be introduced over the course of the next four years, or bureaucracy increased, Hundt added.

In a further endeavour to increase the liquidity of businesses, Hundt has proposed that businesses are allowed, as a temporary measure, to offset recent losses incurred as a result of the prevailing economic crisis with profits accrued from previous years.

President of the German Chamber of Commerce and Industry (DIHK) Hans Heinrich Driftmann has also called for the new government to make radical changes to the country’s existing corporate income tax, and to its inheritance tax.

Given that the pre-election tax cut promises made by both the CDU and the FDP proved decisive in their election victory, much is now riding on the outcome of these initial negotiations.

Yet both parties have already publicly admitted that they are determined to remain true to their policies and not bow to outside pressure.

Chancellor Merkel has rallied the Union party, urging the CDU and its Bavarian sister party the Christian Social Union (CSU) to present a united front ahead of negotiations, in order to ensure that the talks are not three-way.

Although there is agreement between the Liberals and the Union on many central issues, the two parties are nevertheless divided on key areas of taxation.

While CDU leader Angela Merkel is eager to wait until 2011 before cutting tax, her FDP counterpart Guido Westerwelle has repeated his calls for faster and deeper tax relief.

The FDP are determined to create a simpler tax system comprising just three income tax brackets: 10%, 25% and 35%. This would mean lowering the first rate of income tax from 14% to 10% and also drastically lowering the top rate of income tax from 45% to 35%. Cuts in income tax of this scale are thought to amount to tens of billions of euros per year – clearly out of the question for Angela Merkel and the CDU.

Although the CDU are in favour of implementing tax reductions, it intends to progressively reduce the lowest rate of income tax to 13% initially, and then further to 12%. Regarding the tax levied on top earners, the Union plans to increase the threshold for the top rate of income tax (currently 45%) in stages, raising it from EUR52,552 to EUR55,000 in the first instance, then finally to EUR60,000. The party does not intend, however, to alter the rate.

Clearly much work lies ahead for the two parties in resolving their differences, and a honeymoon period appears very much out of the question. Yet as the coalition parties deliberate, businesses wait anxiously in the wings.

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