German Income Tax Cuts Brought Forward To 2004

by Ulrika Lomas, Tax-News.com, Brussels

01 July 2003

The German government put an end to speculation at the weekend by agreeing to bring forward a package of income tax cuts intended for 2005 to 2004.

The decision was taken at an extraordinary meeting of the cabinet at a secluded country hotel on Saturday, and ministers hope that it will help to kickstart the troubled German economy. It will mean that the top rate of income tax will be cut from its present rate of 48.5% to 42%, with the bottom rate also reduced from 19.9% to 15%.

It has been reported that the proposed tax cuts will cost 18 billion euros, but it is not entirely clear at present how the German authorities intend to finance the package. The government, however, appears to believe that the measures will be effectively self-financing, as a result of the increased economic activity that it is clearly hoping will take place.

The revelation is likely to set pulses racing in Brussels, as the eurozone's largest economy looks set to breach the Growth and Stability Pact debt rules for a third consecutive year. Last week, EU monetary affairs commissioner Pedro Solbes appeared openly critical of German economic policy with regard to taxation, insisting that the country's "first priority should be the implementation of the much talked about and long overdue structural reforms, including pension and healthcare reform." He continued rather ominously: "The German government should not count on support by the Commission if their budget proposals are not compatible with the fiscal rules."

The EU has the power to impose heavy fines on member states which allow their budget deficits to rise above 3% of GDP.

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