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Bundesrat Blocks German Tax Cut Plans

by Ulrika Lomas, Tax-News.com, Brussels

16 May 2012


Germany’s coalition government has failed to secure a majority for its EUR6bn (USD7.7bn) tax cut plans in the German Bundesrat, or upper house of parliament, despite predicted additional tax revenues of around EUR30bn by 2016, compared to the November 2011 tax estimate.

As expected, Germany’s main opposition parties the Social Democrats (SPD) and the Green Party (Grünen) firmly rejected the government’s latest bill aimed at alleviating fiscal drift in the country’s income tax system, insisting that the tax cuts are diametrically opposed to budgetary consolidation, and would be simply “irresponsible” without measures to counter-finance the proposals, particularly given the debt brake rule enshrined in basic law.

Defending his decision to veto the coalition’s plans in the Bundesrat, Baden-Württemberg’s Prime Minister Winfried Kretschmann (Green Party) said that although the state had not completely ruled out the idea of according tax reductions to low- and middle-income earners in Germany, the plans would first have to be financed by higher taxes imposed on the country’s top earners to secure the state's approval.

Rejecting the proposals, Mecklenburg-Vorpommern’s Prime Minister Erwin Sellering (SPD) argued that given the ongoing crisis in the eurozone and the potential incalculable risks to the German economy, it would simply be irresponsible to lower taxes rather than to reduce debt. Consolidating state budgets must take precedence, Sellering added.

Nord Rhine-Westphalia’s Finance Minister Norbert Walter-Borjans (SPD) also underlined the need to introduce initiatives to counter-finance the tax cut proposals to avoid widening existing budget deficits.

In contrast, and defending the government’s tax cut proposals, Bavaria’s Economy Minister Martin Zeil underscored the importance of the bill, which is designed to ensure greater tax justice in Germany. A rise in the top rate of income tax would merely serve to slow economic recovery, Zeil maintained.

Financial State Secretary Steffen Kampeter also defended the government’s bill, arguing that the coalition could simply no longer allow “secret tax rises” to continue nor could it continue to profit from wage rises, especially in view of the additional tax revenue forecast in the May tax estimate.

According to the latest working group tax estimate, Germany’s federal government, states, and municipalities can expect ‘moderate’ additional tax revenues both this year and in subsequent years, further confirmation, the German finance ministry insists, that there is currently scope for the government’s tax cut plans, aimed at eradicating fiscal drift in the country’s income tax system.

Compared to the November estimate, tax revenues are expected to increase this year by an additional EUR4.6bn, by an additional EUR5bn in 2013, by a further EUR6.4bn in 2014, by an additional EUR6.2bn in 2015, and finally by a further EUR7.2bn in 2016.

The May tax estimate confirms that the government’s plans to eradicate fiscal drift (evident in Germany since 2010) from January 1, 2013, are not only “just and necessary”, but would also be “well financed” by the predicted additional tax revenues, according to the finance ministry.

Fiscal drift (also known as ‘bracket creep’) occurs when the government fails to adjust marginal income tax brackets in line with wage inflation, meaning more taxpayers are dragged into the higher income tax bands and thus suffer a tax increase.

Adopted by the German Bundestag, or lower house of parliament, at the beginning of April, the coalition’s tax cut bill provides for a progressive rise in the personal income tax allowance by a total of EUR350, or 4.4%, by 2014, to be achieved in two stages: by EUR126 (rising to EUR8,130) from January 1, 2013, and by a further EUR224 (rising to EUR8,354) from January 1, 2014.

In accordance wit the bill, income tax bands in German will also rise by a total of 4.4%.

The black-yellow coalition now plans to salvage its tax cut proposals by submitting the bill to a mediation committee for examination.

TAGS: tax | law | Germany | inflation | individual income tax

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