tax policy

A Taxing Election Issue

  • Why it matters

    Why it matters

    Who wins the German election will have a significant impact on how much tax voters pay. The issue could give a lackluster campaign genuine edge in its final phases.

  • Facts

    Facts

    • After three successive years of budget surpluses and with ultra-low interest rates shrinking debt repayments, German parties can plausibly offer substantial tax cuts.
    • Both the center-left SPD and center-right CDU promise to reduce taxes, but differ on emphasis, with the CDU proposing cuts at every income level.
    • The Social Democrats’ are positioning themselves as the part of social justice. Their redistributive tax plans would benefit low and middle-earners, with tax rises for top earners.
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    Audio

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Martin Schulz und Angela Merkel
Martin Schulz has struggled to set his party apart from Angela Merkel’s CDU. Source: DPA

Germany’s election campaign is drifting quietly to a close. Unless events intervene — always a possibility — Chancellor Angela Merkel looks set to coast to a fourth term on September 24. The only real question looks to be the composition of her next coalition.

The big problem for Martin Schulz’s center-left Social Democratic Party, or SPD, has been differentiating itself from a chancellor who excels at stealing her opponents’ policies and their thunder.

One area where the Social Democrats could still carve out an identity is on tax policy, where there are genuine differences across the party spectrum. So far, the reluctance of some parties — above all, Ms. Merkel’s Christian Democrats, or CDU — to provide detailed figures has made teasing out those differences difficult.

The big difference between the two main parties is in their treatment of top earners.

But now, new information obtained by Handelsblatt and analyzed by Munich’s Ifo Institute for Economic Research makes comparisons easier.

The data shows that the SPD’s plans for tax cuts will benefit most taxpayers, but especially lower earners. The CDU’s plans lean to favoring better-off taxpayers. Shrewdly spun, the information could help Mr. Schulz position the SPD as the true party of social justice.

In June, the SPD surprised many by proposing a complete and rapid abolition of the “solidarity surcharge” for lower earners. The surcharge, at a rate of about 5.5 percent, was introduced a quarter-century ago, initially to pay for the spiraling costs of German unification.

The Social Democrats also want to cut social security contributions for the poor and increase tax thresholds for middle-income earners, while increasing rates on top earners from 45 to 48 percent. The center-left party also proposes abolishing fees on kindergartens, which could arguably have a greater impact than tax cuts for many families.

The CDU rejects any tax increases, aiming to slash €15 billion, around $18 billion, from the nation’s overall income tax bill, cutting tax rates and raising thresholds for all income groups. However, unlike the Social Democrats, the CDU has no plans to lift the burden of social security contributions on lower earners. The party also plans to scrap the solidarity surcharge, but would take a decade longer to phase it out, leaving it partially in place until 2030.

Detailed analysis by the Ifo Institute suggests the SPD proposals will would save a single person on an annual salary €15,000 an extra couple of hundred euros per year. The picture is more mixed for middle-income earners, with some taxpayers better off under an SPD-led government and others benefiting more from CDU proposals.

The big difference between the two main parties is in their treatment of top earners. A single person making around €150,000 would lose several thousand euros under the SPD, but would save approximately the same amount under the CDU.

SPD tax policy forms part of Mr. Schulz’s bid — unpopular thus far — to present his party as redistributive and strong on social justice. “By abolishing the solidarity surcharge for low and medium earners, the SPD is proposing a targeted easing of burdens,” SPD politician Carsten Schneider said. “But the CDU disproportionately favors the better-off.”

The CDU argues that unlike the SPD, it would actually reduce taxes overall. “Our tax cutting is genuine — we won’t raise taxes elsewhere,” Ralph Brinkhaus, the CDU’s deputy parliamentary leader, said. “In this, we are very different from the SPD: they only want to redistribute the tax burden.”

Tax policy could give a sleepy election campaign genuine edge in its final phases.

In the last two elections, tax policy was crucial to differentiating the parties. Four years ago, the SPD and the Green Party wanted to raise taxes, while the CDU promised not to. This time round, the two main parties are both promising cuts.

This apparent similarity may be one reason the issue remains on the back burner. But Ifo researcher Niklas Potrafke says this could change. “Tax policy is one of the few issues where the large parties are actually quite different,” he said.

Differences on tax policy are even clearer between the smaller parties.

The Left Party is proud of what party leader Katja Kipping claims are the “only concrete, seriously costed tax proposals” in the campaign. To fund its ambitious social programs, the party wants to raise taxes on incomes above €70,000 from 42 to 53 percent, with incomes over €1 million taxed at 75 percent. Their plan also includes a wealth tax and increases in inheritance tax.

“On tax, we are very different to the SPD: we want to cut, they only want to redistribute the tax burden.”

Ralph Brinkhaus, CDU deputy parliamentary leader

The environmentalist Green Party also wants higher taxes on the top earners, including a wealth tax on the “super rich,” and possibly a new inheritance tax. There would be new tax breaks for families and increased allowances for the low-paid, with small businesses granted greater write-offs and simplified returns.

The pro-business Free Democrats, or FDP, are presenting the most radical tax-cutting program, with cuts at every income level, the earliest possible abolition of the solidarity surcharge, and new tax breaks to support families and encourage home-building.

Unlike the other smaller parties, the FDP is firmly against any wealth tax or increase in inheritance duties. Now polling strongly after some years in the wilderness, the party may hope to approach its 2009 success, when its call for a “simple, just and reduced taxation system” brought its best ever results.

 

Martin Greive is a correspondent for Handelsblatt, Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin. To contact the authors: greive@handelsblatt.com, hildebrand@handelsblatt.com

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