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Economists Urge Germany To Cut Tax

by Ulrika Lomas,, Brussels

29 September 2017

Economists have urged the next German coalition government to use its fiscal surplus to cut tax, particularly on labor.

The Autumn 2017 Joint Economic Forecast from Germany's leading economic research institutes predicts that tax revenues will remain buoyant over the next two years as the economy continues to grow, pushing the budget surplus to as high as EUR44bn (USD51.7bn) by 2019, assuming current fiscal policy is maintained. This provides the Government with an opportunity to lower Germany's tax burden, the forecast said.

"In view of the high burdens imposed on labor incomes in the form of levies and a particularly sharp increase in direct tax revenues, the focus should be on the income tax rate curve," the forecast, published by the Kiel Institute for World Economics on September 28, stated.

The forecast added that "there is also scope for action in terms of social security contributions, which are also of particular significance to low-income workers."

It is not the first time that economists have called for the Government to ease the tax burden in the light of a growing fiscal surplus. In April 2017, Germany's five leading economic research institutions noted in their joint spring economic forecast that tax revenues in relation to gross domestic product now exceed 40 percent, a ratio set to continue rising unless the Government cut taxes.

"It is high time that economic policy puts its focus on the long term, [and] limits the increase in the tax burden," the insitututes said.

German Chancellor Angela Merkel's Christian Democrat Union (CDU), which won the largest share of the votes in the recent parliamentary election while falling well short of a majority, proposed tax cuts worth around EUR15bn (USD16.6bn) per year in its election manifesto.

Specifically, the CDU pledged to raise the threshold for the current 42 percent top rate of income tax to EUR60,000 from EUR54,000, phase out the solidarity tax, and provide tax relief for research and development spending.

However, any future tax reforms may be dictated by the composition of the new governing coalition, which is expected to be formed of the CDU, the economically liberal Free Democratic Party (FDP), and the Green Party, in a so-called "Jamaica" coalition, named after the combination of each party's colors.

All three parties have different ideas on taxation. The CDU advocates fiscal conservatism and has proposed moderate tax cuts. However, the FDP says that the time to share the fruits of the fiscal surplus is long overdue. It is calling for a "fundamental rethink on tax policy." Noting that tax revenues are predicted to increase by EUR110bn by 2022, the FDP has called for tax cuts of at least EUR30bn.

Meanwhile, the Green Party is calling for a more progressive personal income tax system, with tax cuts for those on low incomes to be subsidized by an increase in the top rate of tax for individuals earning in excess of EUR100,000.

The Green Party tax platform also proposes taxing capital gains as personal income, supports the introduction of a financial transactions tax, and calls for the taxation of energy to be aligned with CO2 emissions.

TAGS: individuals | tax | fiscal policy | energy | budget | Jamaica | Germany | research and development

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