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Germany Defends Plans To Raise Tax-Free Allowance

by Ulrika Lomas,, Brussels

14 November 2012

Germany’s federal cabinet has recently adopted a report pertaining to the minimum subsistence figure for adults and children in Germany, determining the basic personal allowance that is guaranteed tax-free.

The German finance ministry insists that the report confirms the fiscal policy of the black-yellow coalition government as regards the need to reduce the effects of fiscal drift or bracket creep (kalte Progression) in the country’s income tax system.

In Germany, a minimum subsistence figure is guaranteed for the basic cost of living and no tax is paid on income derived from employment up to this amount. In practice, the basic personal allowance fulfils this function. The amount of the allowance is reviewed every two years to ensure that it is not below the minimum needed for subsistence, as provided for in the constitution.

Since 1995, a report has been drafted biannually to determine the minimum subsistence figure for adults and children on the basis of statistical data. In connection with this, the government aims in future to ensure that a report is also issued every two years to determine the impact of fiscal drift.

According to the finance ministry, the last report from spring 2011 highlighted the need to raise the existing basic allowance of EUR8,004, given that this figure will not be sufficient to cover the basic costs of living for adults in 2013. The ministry explains that on the basis of this 2011 report, the government provided for the necessary changes to be made to the personal tax-free allowance within the framework of the draft law designed to alleviate the effects of fiscal drift.

The ministry says that the latest report confirms the calculations set out in the bill, which is currently being examined by lawmakers, namely that there will be a EUR120 shortfall in the basic allowance in 2013 and a EUR348 shortfall in 2014. The government’s bill provides for a EUR126 rise in the basic personal allowance from January 1, 2013, and for a further augmentation of EUR224 from January 1,2014, amounting to a total rise of EUR350.

Concluding, the ministry underlines that the planned amendments to the basic personal allowance are not only sufficient but also imperative, to ensure that from January 1, 2013, the basic allowance provisions are not unconstitutional. Lawmakers must therefore swiftly adopt the bill so that citizens in Germany are not subject to higher tax following a wage rise, the ministry warns.

TAGS: tax | law | Germany | individual income tax

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