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German Industry Seeks Action To Combat Fiscal Drift

by Ulrika Lomas, Tax-News.com, Brussels

10 December 2013


The Association of German Chambers of Commerce and Industry (DIHK) has underlined the need for the incoming Grand Coalition Government to urgently address the issue of fiscal drift (kalte Progression) in the country's income tax system, to prevent creeping tax rises.

Measures aimed at curbing fiscal drift, and preventing a further rise in the tax burden on individuals, must be introduced, the association warned. DIHK cited the German Finance Ministry's own figures, revealing that "a good" EUR17.5bn (USD24bn) in additional fiscal revenues is expected to flow to the state in the new legislative period, as a result of the phenomenon.

Insisting that skilled workers in Germany are already subject to the top rate of income tax, DIHK President Eric Schweitzer underscored the importance of placing and maintaining kalte Progression at the top of the political agenda.

Fiscal drift or "bracket creep" occurs when the Government fails to adjust marginal income tax brackets in line with wage inflation, meaning that more taxpayers are dragged into higher income tax bands and thus suffer a tax increase.

Although the effects of fiscal drift will be mitigated in Germany in 2014, as the basic tax-free allowance is due to rise by EUR224 to EUR8,354 next year, the Government has no plans currently to further increase the basic tax-free allowance in 2015 and 2016.

Furthermore, the Christian Democratic Union (CDU) and Social Democrats (SPD) have not included plans to address the issue of fiscal drift in their Grand Coalition agreement.

The situation was very different before the elections, however. Back in September, Finance Minister Wolfgang Schäuble (CDU) pledged to resubmit a bill to lawmakers, raising income tax bands. At the time, Schäuble stressed that it is vital to combat the phenomenon of fiscal drift, "to correct" hidden tax rises that have neither been decided nor agreed by the legislator.

TAGS: individuals | Finance | tax | law | tax rates | Germany | inflation | individual income tax

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