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Germany's Steinbrück Seeks 49% Top Rate Of Income Tax

by Ulrika Lomas,, Brussels

13 December 2012

Recently nominated by the Social Democrats (SPD) to run for chancellor against rival Angela Merkel next year, Germany’s Peer Steinbrück has called for a rise in the top rate of income tax from 42% to 49%.

Defending his plans to raise taxes for some in Germany, Steinbrück explained that additional tax revenues derived from the planned rise in the top rate of income tax would be used to finance education, infrastructure, transport logistics, communications infrastructure, as well as to finance the shift in energy away from traditional to renewable sources of energy.

Steinbrück said that the 7% tax rise would also ensure adherence to the country’s debt brake rule enshrined in basic law.

Former Finance Minister Steinbrück also announced plans in the event of an election victory next year to increase the taxation of income from capital, to reform the income splitting or “spousal split” (Ehegattensplitting) tax regime, allowing married couples to lower their tax burden by pooling and then dividing their earnings to calculate individual income tax, and to reintroduce wealth tax in Germany.

While congratulating her opponent on his nomination as the SPD’s candidate, Merkel nevertheless underlined the difference between the Christian Democratic Union (CDU) and the SPD, notably in the area of taxation and as regards the interpretation of social justice. Merkel alluded specifically to the SPD’s rejection of the government’s planned income tax reform designed to alleviate the effects of fiscal drift.

Back in May, and as expected, Germany’s main opposition parties the SPD and the Green Party firmly rejected the government’s bill aimed at alleviating fiscal drift in the country’s income tax system, insisting that the tax cuts are diametrically opposed to budgetary consolidation, and would be simply “irresponsible” without measures to counter-finance the proposals, particularly given the debt brake rule.

Rejecting the proposals, Mecklenburg-Vorpommern’s Prime Minister Erwin Sellering (SPD) argued at the time that given the ongoing crisis in the eurozone and the potential incalculable risks to the German economy, it would simply be irresponsible to lower taxes rather than to reduce debt. Consolidating state budgets must take precedence, Sellering added.

Nord Rhine-Westphalia’s Finance Minister Norbert Walter-Borjans (SPD) also underlined the need to introduce initiatives to counter-finance the tax cut proposals to avoid widening existing budget deficits.

Financial State Secretary Steffen Kampeter defended the government’s bill, arguing that the coalition could simply no longer allow "secret tax rises" to continue nor could it continue to profit from wage rises, especially in view of the additional tax revenues recorded so far this year.

Fiscal drift (also known as ‘bracket creep’) occurs when the government fails to adjust marginal income tax brackets in line with wage inflation, meaning more taxpayers are dragged into the higher income tax bands and thus suffer a tax increase.

Adopted by the German Bundestag, or lower house of parliament, at the beginning of April, the coalition’s tax cut bill provides for a progressive rise in the personal income tax allowance by a total of EUR350 (USD455), or 4.4%, by 2014, to be achieved in two stages: by EUR126 (rising to EUR8,130) from January 1, 2013, and by a further EUR224 (rising to EUR8,354) from January 1, 2014.

In accordance with the bill, income tax bands in Germany will also rise by a total of 4.4%.

Last month, the ministry reiterated that the state is not under-financed and warned that it would therefore be wrong to impose hidden tax rises on the country’s low- and middle-income earners by a "lasting acceptance of fiscal drift."

TAGS: tax | energy | law | education | tax rates | Germany | tax reform | inflation | individual income tax

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