Fiscal Fortunes

Growing Calls For Tax Cuts

Germany Government
Mr. Schäuble is keeping a tight fist. Picture source: AP

Finance Minister Wolfgang Schäuble presented his latest tax forecasts this Thursday, the last set before the country goes to the polls for parliamentary elections this fall. He announced record tax revenues: The government forecasts €732.4 billion ($790 billion) in revenue this year, €7.9 billion more than originally anticipated.

And yet, true to Mr. Schäuble’s cautious style, he discouraged all parties from making expensive pledges. He argued that more money is needed for internal security, the German Army and infrastructure, not to mention continuing billions for the refugee crisis. While he does support some tax cuts for lower and middle income groups, it’s nothing significant. Even though his own ministry calculates a tax surplus of €55 billion through 2021, Mr. Schäuble believes there cannot be more than €15 billion in tax cuts.

It is not clear how this will go down. The tax burden on Germans is getting heavier and heavier. The German Finance Ministry estimates nearly 3.9 million Germans are now paying the maximum tax rate. Since 2004, the number of taxpayers in the 42-percent tax bracket has more than doubled. This maximum tax rate is no longer being paid only by the super-rich, but increasingly by well-earning specialists.

And it’s not just the highest earners. The economic institute IW calculates that an average wage-earner paid about 15.7 percent of his income to federal tax authorities in 2005. Today this is 17.6 percent. And that’s not including social security contributions. Taken altogether, Germany has the second-highest overall tax rate of any industrial nation, according to a report last month from the Organization for Economic Cooperation and Development, or OECD.

It wasn’t always this way. The bottom line is, because incomes have risen, and tax rates have not been adjusted for bracket creep, Germans are paying much higher taxes than they used to.

“Here are currently far too many taxpayers who fall under the maximum tax rate of 42 percent.”

Axel Troost, Left Party

The pro-business FDP party, which is fighting to re-enter parliament this year, is leading the charge for tax cuts: “The state’s craving for revenue has taken on kleptocratic dimensions,” said party chairman Patrick Lindner, arguing that Germany’s middle class increasingly pays the maximum tax rate.

Chancellor Angela Merkel and Mr. Schäuble’s Christian Democratic Union, or CDU, have also recognized growing exasperation with the tax burden.

“In Germany, specialists and nurses often approach the highest tax brackets with their overtime,” said Jens Spahn, a CDU steering committee member and deputy finance minister. “This is absurd and needs to be changed.”

And even the socialist Left Party, not known as a tax-lowering group, believes the tax system is unfair. “There are currently far too many taxpayers who fall under the maximum tax rate of 42 percent,” said their financial spokesman Axel Troost.

The problem has become worse over the last few years – and could have an impact on growth if Germany isn’t careful. Incomes have risen dramatically, both because of higher wage growth and inflation, yet tax rates have not been adjusted accordingly. That means more and more taxpayers are finding themselves in the highest tax bracket. This bracket creep leads to what’s called “fiscal drag,” which describes when a taxpayer earns more income and automatically moves into a higher tax bracket, which drives down consumer spending. Mr. Schäuble has been partially balancing this effect out since 2014 by changing the tax rates. But bracket creep from 2010 and 2013 has not been adjusted for. This year, it was especially prevalent.

The maximimum tax rate is increasingly affecting middle-income earners: In 1960 a German had to earn 18 times the average income to be in the top tax bracket. 20 years ago this was two and a half times more. Today it is only one and a half times more.

Single people already pay the maximum tax rate beginning with a yearly taxable income of €54,058. Adjusted for tax allowances, an income over €60,000 ($65,199) is enough to fall into the top tax bracket, too. That’s a decent – but hardly dramatic – income level that about 6.5 percent of all German taxpayers currently make. Go a little higher and the problem becomes even more severe. The worst hit are those who earn €60,000 and €80,000, who pay the top income tax rate, plus higher social security contributions. The ceiling for contributions for social security and unemployment insurance is €76,000 ($82,802). Only then, when households are earning quite comfortably, does the situation start to get better again.

 

Martin Greive is a correspondent for Handelsblatt based in Berlin. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Thomas Sigmund is the bureau chief in Berlin, where he directs political coverage. To contact the author: hildebrand@handelsblatt.com, greive@handelsblatt.com and sigmund@handelsblatt.com

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