German Coalition Split Over Trade Tax

by Ulrika Lomas, Tax-News.com, Brussels

09 November 2010

Eager to reform local authority financing in Germany, Finance Minister Wolfgang Schäuble’s latest proposals to introduce a new local income tax, while at the same time maintaining the trade tax, has met with fierce criticism from all sides, although particularly from among members of ruling coalition partner the Free Democratic Party (FDP).

Marking a clear about-turn, and in an endeavour to woo local authorities, Schäuble has put forward the idea of retaining the controversial trade tax, while at the same time allowing local towns or municipalities in Germany the freedom to determine their own local share of income tax (15%), albeit within a certain range.

This proposal has, however, been vehemently rejected by the FDP. Indeed, Germany’s Economics Minister Rainer Brüderle (FDP) stated that his party had not agreed to such plans to maintain the trade tax. On the contrary, Brüderle underlined the ongoing determination of the FDP to remove the trade tax, which, he added, only exists in Germany. In exchange, he continued, towns would be able to then determine their own income tax.

Brüderle stressed that it is not economically useful to purely consider options for tax increases and not for tax relief. FDP leader Guido Westerwelle has also reportedly opposed Schäuble’s plans, stating that such a reform would ultimately equate to a tax rise, which the FDP could simply not agree to.

Germany’s coalition government has for months been at loggerheads with local authorities over ways in which to improve local financing. Up until now, local authorities have been too heavily reliant on the trade tax, which is exclusively distributed at local level. The trade tax is, however, equally dependent on the economic climate. Initially, both ruling coalition parties were united in their plans to abolish the tax. A commission is currently examining local authority finances.

Echoing views expressed recently by Chancellor Angela Merkel, Schäuble has also reiterated that there is currently no scope for tax cuts in Germany.

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