pre-election promise

The Christmas Gift that Wasn't

  • Why it matters

    Why it matters

    The tax cut is unlikely to give the economy the spending bounce that some of Germany’s neighbors might be hoping for.

  • Facts

    Facts

    • A taxpayer on an average income is likely to be better off by around the price of a couple of cappuccinos a month.
    • Finance Minister Wolfgang Schäuble has also adjusted tax brackets to ensure that taxpayers will not suffer any so-called “creeping tax increases”.
    • A tax for nursing will increase by 0.2 percentage points next year in order to finance recent reforms to long-term care.
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    Audio

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Silvesterparty am Brandenburger Tor
Much ado about giveaways but folks are keeping it real. Source: DPA

It happens all over the world: the year before parliamentary elections, the parties in charge announce a round of tax cuts – or, at any rate, they at least claim to cut taxes.

Germany, which will in 2017 hold parliamentary elections to the Bundestag, is no exception. In a statement posted just before Christmas, the coalition government claimed that its budget for next year includes no less than €6.3 billion ($6.6 billion) in tax cuts.

The tax cuts, which will kick in from the beginning of the new year, amount to the largest reductions since former chancellor Gerhard Schröder, a moderate Social Democrat, in the early years of the last decade.

But that doesn’t mean they’ll be felt by the German public.

There is, unfortunately, one little catch. Despite the claims of billions of euros of tax savings, most people will hardly notice them. The average earner is likely to find him or her self better off by around the price of a couple of cappuccinos a month.

And the wealthy will actually find themselves burdened by higher taxes from January 1, according to calculations by financial analyst Frank Hechtner of the Free University of Berlin and made available to Handelsblatt.

“The tax cuts will be completely eaten up by the additional tax burdens.”

Frank Hechtner, Free University of Berlin

It’s all part of a major reform effort: From the beginning of the year, a whole series of changes to the German tax code will come into force.

Some of these adjustments are routine, like increases to basic allowances for the poor and child-raising benefits. Both are dictated by the German constitution to guarantee a minimum livelihood for poorer people. The children’s allowance, which is raised annually, will go up this time by €2 per month per child.

Others changes are more notable: Finance Minister Wolfgang Schäuble has for the first time in many years agreed to adjust individual tax brackets to ensure that taxpayers will not suffer any so-called “creeping tax increases.” So-called bracket creep, which happens when a taxpayer’s wage gains push them into a higher tax bracket – even if the gains were only in line with inflation – has made many in Germany effectively worse off in the past few years.

But there aren’t just tax cuts among the reforms. Among the tax increases are a change to the nursing care tax, which will increase by 0.2 percentage points in order to finance recent reforms to long-term care. The government is also raising limits on social security contributions and pension insurance.

The increases in these taxable thresholds mean that many wealthier Germans will actually end up with less money in their pockets in 2017, despite the promised tax cuts. Each single person with a gross monthly income of more than €6,500 will have to pay €29 more in taxes to the state in 2017 than this year.

“The tax cuts will be completely eaten up by the additional tax burdens,” Mr. Hechtner told Handelsblatt.

And it’s not just the very wealthy: The professor calculated that even a married couple with two children in this income bracket will be overall worse off in 2017, despite the higher child allowance, particularly if only one person in the couple is earning.

The majority of people with average or below-average income will be better off, but not by an enormous amount. A single person with a monthly gross income of €2,000 a month, for example, will be just €4.20 better off. An average earner with a monthly gross income of €3,500 will be €7 a month better off while someone on €5,500 will be €7.50 better off.

Families by contrast should find themselves slightly wealthier thanks to Germany’s more generous collective income tax assessment and the increased child benefit. A married couple, where one of the spouses earns €4,000 a month and the other spouse does not earn, will be €32 a month better off. If both spouses have decent incomes, for example €4,000 a month each, they will have around €20 a month more in their pockets.

Still, the figures suggest most of the tax code changes are largely cosmetic and will have hardly any impact on individual citizens. It’s an argument Mr. Schäuble has used regularly in recent years to counter calls for tax breaks from those within his ruling Christian Democratic party establishment. While Mr. Schäuble did make adjustments to fend off creeping tax rises, anyone hoping for a bigger tax break will have been waiting in vain.

Even after next year’s Bundestag elections, there are unlikely to be any major changes to the tax system. Mr. Schäuble’s CDU, which is currently governing the country in a grand coalition with the left-leaning Social Democrats, has yet to spell out the details of its tax programs ahead of the election campaign.

What is clear so far is that the Social Democrats, the SPD, will be pushing to reduce social contributions for the low paid and, to a pretty limited extent, the central income tax brackets. The CDU meanwhile has promised tax cuts of around €15 billion, but citizens are unlikely to notice this proposed change either: The cuts would put only about €10 a month more into the pocket of a low-income earner of €2,000 a month.

According to the SPD, a tax cut of at least €50 billion a year would be needed to make a significant difference to most people’s net incomes. That’s extremely unlikely: Neither side has agreed to any major cuts to government spending, while both major parties have pledged to continue balancing the country’s budget – a promise that some outside organizations like the International Monetary Fund have said should be relaxed to boost the euro zone economy.

And it’s not as if there won’t be any additional spending. The federal government is slated to increase expenditure in a number of areas over the coming years. A proposed expansion of the broadband network will devour many billions as will commitments to spend more on defense, internal security and the influx of refugees.

All of this means there are plenty of reasons for Germany’s taxpayers to assume that there will be no major reduction in their tax burden once the Bundestag elections are over.

 

Martin Greive is a financial correspondent for Handelsblatt based in Berlin. To contact the author: greive@handelsblatt.com

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