German Upper House Approves VAT Hike

by Ulrika Lomas, Tax-News.com, Brussels

20 June 2006

Germany's upper house of parliament, the Bundesrat, last week approved a controversial tax hike that will result in the rate of value added tax rising by 3% next year.

The bill, widely regarded as Germany's largest post-war tax increase, proposes to increase VAT to 19% from January 1, 2007. It will also increase the rate of insurance tax by 3% to 19%.

Economists have criticised the left-right coalition for pushing through a measure that some fear will dent Germany's fragile economic recovery by putting the brakes on consumer spending. However, Finance Minister Peer Steinbrueck countered ahead of last week's vote that the government has "no alternative" other than to increase the rate of VAT to help balance the books and reduce the budget deficit, which has breached the EU's 3% of GDP ceiling for the past four years.

"We won't achieve a consolidation of public finances without suffering," Steinbrueck remarked.

Following approval of the legislation by the lower house, the Bundestag, in May, Steinbrueck claimed that the government "will have done everything that is needed to secure our revenue base".

The VAT hike, which is also accompanied by spending cuts and structural reforms, 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.

Recommended