Germany's ruling Social Democratic Party (SPD) is attempting to revive plans for a flat rate of corporation tax ahead of the general election, expected in September 2005.
According to deputy finance minister Barbara Hendricks, the SPD wants to eliminate the different tax rates paid by private and incorporated companies which sees 90% of Germany's 3.4 million firms pay corporate tax at a top rate of 42%, whilst public companies pay a flat rate of 25% with surcharges.
"Signs are that the party will adopt the proposal, the only realistic way to simplify the tax system," Hendricks told reporters in Berlin on Tuesday.
Under proposals announced in March by Chancellor Gerhard Schroeder, the 25% flat rate will be reduced to 19%. However, the ruling SPD and the principal opposition Christian Democratic Union have been unable to agree on how the tax cut will be financed in the light of falling revenues and a stagnating economy.
The government's tax plans have also been thrown into disarray after Schroeder called for an early general election for this September following an electoral defeat in the SPD stronghold of Nord-Rhein Westphalia last month. As a result, the tax policy debate has shifted towards simplification of the tax system rather than tax cuts.
The government is also examining proposals for a dual income tax system, which has been recommended by the economic advisory panel dubbed the five 'wise men'. This system would distinguish between employees' pay and private companies' gross earnings for tax purposes.
With Germany's fiscal finances in a mess at both federal and state level, even the right-of-centre CDU, which had previously trumpeted cuts in the bottom and top rates of income tax, accepts that simplification is a higher priority now.
In particular, the CDU is keen to bring smaller German firms, which have a different legal form to larger companies, into the tax net. Fewer than 20% of Germany's small firms pay corporation tax.
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