German Lawmakers Approve VAT Hike

by Ulrika Lomas, Tax-News.com, Brussels

23 May 2006

German Finance Minister Peer Steinbrueck has said that a package of tax increases approved by the lower house of parliament last week will be the last round of tax hikes pushed through by the left-right coalition.

German lawmakers sitting in session on Friday approved what is effectively Germany's largest post-war tax increase by consenting to a budget that includes a 3% rise in value added tax from January 1, 2007.

However, according to Steinbrueck, the legislation, which must also be approved by the upper house of parliament, would mean that the government "will have done everything that is needed to secure our revenue base".

Germany, grappling with the twin spectre of a high budget deficit and a sluggish economy, is attempting to close a budget gap that has exceeded the European Union limit for several successive years. The government is forecasting that the budget deficit will equal 3.3% of gross domestic product this year - unchanged from last year. The EU ceiling is set at 3% of GDP.

The VAT hike is projected to raise about EUR20 billion ($26 billion) annually, although one-third of this revenue will be used to offset the cost of reducing compulsory unemployment insurance contributions to 4.5% from 6.5% from next year.

The German government has also approved a new wealth tax, which sees the top rate of income tax raised by 3% to 45% from the start of 2007, and has closed a number of tax loopholes and reduced subsidies in order to increase revenue flows.

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