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German Committee Blocks 'Fiscal Drift' Plans

by Ulrika Lomas,, Brussels

17 December 2012

Germany’s mediation committee, comprising members of both the Bundestag (lower house) and Bundesrat (upper house) have recently sanctioned plans to increase the tax-free allowance for 2013 and 2014, while at the same time vetoing plans to further correct the phenomenon via adjustments to the income tax scale.

The mediation committee also blocked coalition plans to accord tax breaks for individuals electing to carry out work on their property, to improve energy efficiency in the home.

The measures were blocked by both the Social Democrats (SPD) and by the Green Party.

Consequently, although the tax-free allowance will now rise progressively in 2013 and in 2014 from EUR8,005 (USD10,535) to EUR8,354, income tax bands will not now rise as planned by a total of 4.4%.

The 14% entry rate of income tax will not rise, however. The coalition parties managed to block opposition calls for the increase.

According to the German finance ministry, the committee’s decision to block efforts to reduce fiscal drift in the income tax system will merely lead next year to "back door" tax rises for employees in Germany, preventing a reduction in "undesirable tax revenues" above all from low- and middle-income earners.

While welcoming the adoption of provisions increasing the tax-free allowance, the finance ministry warned that tax rises are no substitute for a solid budgetary policy.

Defending the party’s decision to reject the planned rise in the income tax bands, the SPD’s Thomas Oppermann argued that there is currently no financial scope to do so as the measure would merely have been financed by debt.

The SPD insisted that the country’s wealthy should not profit for the tax relief proposals, while low- and middle-income earners barely reap any benefits from the reform.

Following the failure of the coalition’s tax cut plans in committee, the ruling Free Democratic Party (FDP) underlined the need for a "Plan B," advocating instead a reduction of the country’s solidarity surcharge.

Echoing these views, Reiner Holznagel of the German Association of Taxpayers (der Bund der Steuerzahler – BdSt) called for the solidarity tax to be abolished, alluding to the considerable additional levels of state tax revenues this year which offer significant scope to take such action.

Lamenting the lack of a consensus on plans to introduce tax breaks for home energy improvements, the German finance ministry highlighted the fact that leading experts are all in agreement that tax incentives are the best and fastest way to achieve the country’s energy goals and to facilitate the much-needed shift in energy policy.

The government had planned to introduce tax breaks, accorded to individuals electing to carry out energy efficiency improvements in the home, applicable to homeowners of pre-1995 properties, provided that the improvements significantly reduce the energy demands of the building. Under the terms of the bill, property owners would be able to deduct from tax 10% of all home improvement costs annually for a period of up to ten years, a measure set to cost the government EUR1.5bn.

TAGS: individuals | environment | tax | energy | budget | Germany | tax breaks | individual income tax

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