Germany To Introduce Tax On Wealthy

by Ulrika Lomas, Tax-News.com, Brussels

04 May 2006

The Grand Coalition led by Chancellor Angel Merkel has agreed to increase income tax for Germany's highest paid citizens as part of plans to reform the tax and healthcare system.

Under a deal struck by members of the left/right coalition, those earning more than EUR250,000 a year (US$316,000) will face a 3% tax increase from 2008 as the top rate of income tax rises to 45%.

The deal came after five hours of intensive night-time negotiations earlier in the week which concluded months of internal wrangling between members of the Coalition on tax reform.

While the decision to introduce a tax on the wealthy will please the left of centre Social Democrats who have long called for such a measure, conservative Christian Democrats succeeded in getting the tax hike delayed until 2008 when crucial corporate income tax reforms are due to go into effect.

Under Germany's complex corporate tax rules, many small businesses pay the same rates as income taxes, and conservatives had feared that by introducing the new tax in 2007 as the Social Democrats had hoped, small firms would also have been burdened by extra taxes.

The German government is currently examining plans for an overhaul of corporate taxes aimed at cutting the tax burden for businesses and simplifying the system in general. It has pledged to reform the system by 2008.

While the government is expecting the new tax to provide more than EUR1 billion in additional revenues, some economists consider the measure a largely symbolic token gesture designed to pacify left-wingers unhappy at benefit cuts, and will raise closer to EUR300 million annually.

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