Germany's FDP Presents Tax Reform Plans

by Ulrika Lomas, Tax-News.com, Brussels

15 April 2010

Germany’s Free Democratic Party (FDP) has finally unveiled details of its revised – and somewhat watered-down – tax model, predominantly designed to reduce the fiscal burden borne by low- and middle-income earners.

In a bid to appease its coalition partner, the Christian Democratic Union (CDU) party, the Liberals have presented their revised tax plans. By way of a compromise, the new model not only reduces the volume of tax cuts proposed, but also stipulates that the top rates of income tax and wealth tax should both remain unchanged.

According to the proposals, the FDP aims to reduce the burden on taxpayers by around EUR16bn by 2012 at the very latest. This figure pales into insignificance when compared to the EUR34bn in tax cuts pledged during its election campaign, and even when compared to the EUR24bn negotiated as part of the coalition agreement.

Determined to replace the existing system of linear income tax rates with a graduated system, the FDP has also compromised on the number of tax rates. As part of its election promise, the party pledged to introduce a graduated system with three income tax rates (10%, 25% and 35%). According to the revised plans, however, the linear system will be replaced by a graduated system comprising five income tax rates (14%, 25%, 35%, 42% and 45%).

Rejecting claims that the party has broken its election promises, the FDP’s Deputy Leader Andreas Pinkwart and tax expert Hermann Otto Solms explained that the party’s revised concept on tax reform makes full use of the scope laid out in the coalition agreement, and that in the context of the financial and economic crisis it was always clear that the radical tax reform sought by the Liberals could not be realised in one legislative period.

While the CDU’s budgetary experts have praised the FDP’s willingness to compromise, they have also warned against promising taxpayers too much. Indeed, high-ranking CDU politicians continue to voice their concerns over further tax reductions for individuals, underlining the fact that consolidation of the budget should take top priority, and emphasizing the need to await the tax estimate in May.

The Liberals intend to adopt the party’s tax reform concept at the forthcoming party conference due to take place at the end of April.

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