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German Tax Revenues To Hit Post-War High

by Ulrika Lomas,, Brussels

14 May 2007

The German Finance Ministry has projected the largest fiscal surplus in the country's post-war history thanks to a recent glut in tax revenue collection, a trend which the government believes will continue in the coming years due to unexpectedly high levels of economic growth.

The figures, released by the Ministry last week, are likely to increase pressure on German Finance Minister Peer Steinbrueck to lower taxes or restore spending to public services, which have been cut as the government attempts to reduce its deficit.

In its monthly budget report, the Finance Department said that a total of EUR1.1 trillion (US$1.5 trillion) in revenues have been collected at federal level so far this year. Tax revenues in April alone stood at EUR284 billion - a record for a single month.

According to the government, economic growth of 2.3% this year and 2.4% in 2008 will mean an unexpected surge in tax revenues over the coming months.

Consequently, the ministry is expecting tax revenues to be EUR20.2 billion higher than forecast in 2007, and EUR47.9 billion higher in 2008. For the period 2007 to 2010, tax revenues are expected to be EUR86.9 billion higher than estimated last November. The projections represent the biggest surplus in tax revenue since modern Germany was founded in 1949, according to the Finance Ministry.

Tax revenue forecasts were previously based on November's economic forecast of just 1.5% GDP growth for 2007.

Amid calls from the left to restore spending levels and cut individual tax rates, and from business supporters for more investment-spurring tax cuts, Steinbrueck has indicated that the government will stick to its guns and use the money to reduce the budget deficit.

"The federal government will reduce its net new borrowing to zero by 2011 at the latest," he said in a statement.

"A reduction of the countrywide structural deficit to zero is achievable by 2010 at the latest," he added.

However, the updated tax revenue forecasts exclude reductions in revenues expected as a result of corporate tax cuts due to go into effect in 2008.

In November last year, Germany's coalition government arrived at an agreement over key company tax reforms which will reduce the overall corporate tax burden, currently one of the highest in the world. These reforms will cut the overall corporate tax burden to a little under 30% from the current level of almost 40%, and will be brought about largely by a cut in the 25% headline corporate tax rate, paid by large companies, to 15% in 2008. Companies will continue to pay corporate tax at the local level at an average of about 13%.

While these cuts could cut revenues by about EUR25 billion from 2008 to 2011, the money would be clawed back through efforts to widen the tax base.

One offsetting measure is the controversial decision to restrict the amount of interest that German companies can deduct from loans received from overseas units. Many business leaders worry that this measure will restrict companies' ability to invest.

The ruling coalition parties also agreed to introduce a 25% capital gains tax from January 1, 2009. This will replace the current system, whereby capital gains are subject to personal income tax, which can be as high as 42%. This will apply to income from earned interest and dividends, and private investors' share sales.

In another bid to increase revenue collection, an increase in value-added tax to 19% from 16% went into effect in January 1, 2007.

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