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German Cabinet Unites On Tax Cut Bill

by Ulrika Lomas,, Brussels

12 December 2011

The German cabinet has now adopted the long-awaited bill providing for an increase in the personal tax allowance and tax brackets in Germany to compensate for the effects of inflation (fiscal drift).

The bill aims to reduce the tax burden on individuals in Germany by a total of EUR6bn a year (USD8.25bn), to be implemented in two stages in 2013 and 2014.

In accordance with government plans, the personal income tax allowance is to progressively rise by a total of EUR350, or 4.4%, by 2014 to EUR8,354 in two stages: by EUR126 from January 1, 2013, and by a further EUR224 from January 1, 2014.

Income tax bands in Germany will also rise by a total of 4.4%.

In future, the black-yellow coalition also plans to examine the effects of fiscal drift every two years to determine whether or not similar adjustments are to be made.

The finance ministry underscores that there will be no adjustments made to compensate for fiscal drift as regards annual income above EUR250,000 for individuals or in excess of EUR500,000 for married couples, those currently subject to a 45% rate of income tax or so-called “rich tax”.

The bill now requires the approval of both the German Bundestag, or lower house of parliament, and the Bundesrat, or upper house of parliament.

However, the Social Democrats rejected the tax cut plans of the coalition from the outset and have threatened to veto the plans in the Bundesrat, where the government no longer has a majority.

Denouncing the planned tax cuts as useless, and claiming that the measures would also reduce the burden on those with high salaries, SPD leader Sigmar Gabriel warned that the SPD-led states would not back the proposals in the Bundesrat if the increase in the personal income tax allowance is not counter-financed.

Defending the party’s stance, Gabriel insisted that given the fact that over EUR25bn in new debt is expected in 2012, additional tax revenues should first be used to reduce the country’s debt. Consequently, Gabriel underscored that as soon as the government’s bill is submitted to parliament, the party would consider a constitutional challenge to the proposed tax cuts, noting that in accordance with the debt brake rule enshrined in basic law, deficit reduction has priority.

Gabriel insisted that Chancellor Angela Merkel was setting a bad example in Europe by proposing tax cuts in the middle of the debt crisis.

Yet defending the measures at the beginning of November, German Chancellor and leader of the ruling Christian Democratic Union (CDU) party Angela Merkel underscored that the measures were indeed a step towards greater tax fairness. Merkel emphasized that the proposed initiatives would also serve to strengthen the forces of growth in Germany.

At the time, leader of ruling coalition partner the Free Democratic Party (FDP) Philipp Rösler emphasized that the plans mark the beginning of the end to the phenomenon of fiscal drift, noting that regular adjustments to income tax bands would be made taking into account inflation.

TAGS: individuals | tax | law | tax thresholds | legislation | Germany | legislation amendments | inflation | individual income tax

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