German Coalition To Increase Taxes

by Ulrika Lomas, Tax-News.com, Brussels

14 November 2005

After two months of wrangling, Germany's coalition partners have agreed a tax-hiking deal that makes Angela Merkel Chancellor and lights a bonfire of her campaign promises to reform and cut tax.

The deal will now be put to party conventions today by the Christian Democratic Union, its Bavaria ally the Christian Social Union and the center-left Social Democrats. Then parliament will be able to elect Ms. Merkel as Germany's first female chancellor on November 22nd.

VAT will be raised from 16% to 19% from January 1st, 2007, and there will be a 3% income-tax surcharge for high earners, taking the top rate of income tax to 45%, although small businesses will be exempt. A number of income tax concessions will be withdrawn, including many business subsidies and tax breaks for teleworkers, commuters and private house-builders.

The primary goal of the package is to cut Germany's deficit to the Stability and Growth Pact level of 3% by 2007. The budget deficit this year is expected to be US$41 bn.

Part of the extra VAT take, however, will be allocated to reducing social security contributions by up to 2% from the current level of 6.5%.

The retirement age will be raised to 67 from 65, pension benefits will be frozen for the next four years, and employees’ legal protection against dismissal will be weakened during the first two years of employment.

There is the promise (but no more than that) of corporate tax reform by 2008, including a cut in business tax by several percentage points from the current level of 25%, and abolition of the differing tax treatment of small and large companies.

Employers and business lobbies gave the package the thumbs down: “There is no hint in this package of the quantum leap we would need for economic growth to return to Germany after years of stagnation,” said Dieter Hundt, head of the Bundesvereinigung der Deutschen Arbeitgeberverbände (BDA) employers association.

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