German Economics Minister Prepares 2010 Tax Reform

by Ulrika Lomas, Tax-News.com, Brussels

19 February 2009

Confident that the global economic crisis will slowly loosen its grip, and that the German economy will begin to recover by the autumn of this year, Germany’s freshly appointed Minister for Economics Karl-Theodor zu Guttenberg is determined to implement a long-awaited reform of the country’s tax system in 2010.

Despite acknowledging the severity of the prevailing economic crisis, Guttenberg’s belief in the imminent up-turn of the economy means that he is already meticulously preparing for comprehensive reform and currently analysing several possible concepts – with Chancellor Merkel’s full support.

According to Guttenberg, scope to reduce the tax burden lies in ‘bracket creep’ – a phenomenon whereby monetary depreciation coupled with unchanged taxes has meant that a larger proportion of tax is levied on high earners. Guttenberg believes that this means of generating additional revenue for the government is unjustifiable. Fellow member and Chairman of the Christian Social Union party Horst Seehofer has also pledged previously that this issue will form a key part of the party’s forthcoming election campaign.

Guttenberg’s optimism is based largely on his hopes for the success of the government’s stimulus package. Although recently approved by parliament, the federal council has yet to ratify the proposals. Before sanctioning the plan, however, the liberal Free Democratic Party is urgently calling for a mediation committee to be set up in order to reach a compromise on two key fiscal amendments: firstly, that the income tax reduction takes effect from January 1, 2009, instead of 2010, and secondly, that the proposal to levy tax on interest is swiftly withdrawn.

Germany’s historic stimulus package amounts to around EUR50bn in 2009 and 2010, with an additional EUR30bn in the form of guarantees.

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