election promises

Tax Cuts Left, Right and Center

Bundeskanzlerin Angela Merkel (l, CDU) und Bundesfinanzminister Wolfgang Schäuble (CDU) unterhalten sich am 17.07.2015 während der Sondersitzung des Deutschen Bundestags zu Griechenland-Hilfspaketen in Berlin. Der Bundestag entscheidet heute in einer Sondersitzung über Verhandlungen für neue Finanzhilfen für Griechenland. Foto: Bernd von Jutrczenka/dpa +++(c) dpa - Bildfunk+++
Talking taxes.
  • Why it matters

    Why it matters

    Germany has a budget surplus and with the general election a year away, some politicians are promising tax cuts.

  • Facts

    Facts

    • Despite the influx of more than 1 million refugees last year, Germany has a budget surplus of €18.5 billion.
    • Germany’s next general election will likely take place in the last two weeks of September 2017 or the first two weeks of October.
    • The CDU may call for tax cuts that would reduce government revenue by €12 billion to €15 billion while the Social Democrats would prefer investment in education and research.
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  • Audio

    Audio

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The sound of conservative politicians clamoring for tax cuts is a sure sign that Germany is entering an electoral campaign.

The next general election will take place just over a year from now, in fall 2017. Last spring, Finance Minister Wolfgang Schäuble, a prominent member of Chancellor Merkel’s conservative Christian Democratic Union party, was the first to float the idea of tax relief after the election.

He suggested the state relinquish about €12 billion in annual tax revenue, roughly two-thirds of the budget surplus that Germany achieved last year.

A few other center-right politicians eagerly joined the discussion, with some coming up with significantly less conservative estimates, especially after the government statistics office announced last week that Germany recorded a higher-than-expected €18.5 billion budget surplus in the first half of 2016. CDU economists and representatives of the country’s robust network of mid-sized companies demanded the party include a €35 billion tax rebate in its electoral manifesto. The party is expected to announce a final decision at its party conference in December at the latest.

the last time the taxpayers enjoyed any meaningful tax breaks was under Angela Merkel’s predecessor, Social Democrat chancellor Gerhard Schröder, back in 2001.

“Tax relief is a key issue for the next legislative period,” Bavaria’s finance minister, Markus Söder, said. The Christian Social Union, sister party to Ms. Merkel’s CDU in the wealthy southern state, suggested that the conservative CDU-CSU group become “the party of tax rebates.”

Thanks to strong growth, Europe’s largest economy has been running a budget surplus since 2014, despite boosting spending to cover the costs of over 1 million refugees who have arrived in the country since early last year. Yet the last time the taxpayers enjoyed any meaningful tax breaks was under Angela Merkel’s predecessor, Social Democrat chancellor Gerhard Schröder, back in 2001.

This time around, the Social Democrats are somewhat less enthusiastic about implementing across-the-board tax cuts. The current party leader, Sigmar Gabriel, criticized the conservatives’ “gigantic” promises. Mr. Gabriel, who is also the economics minister in Ms. Merkel’s coalition cabinet, said he favors more specific financial relief measures for employees, families and single parents, mostly in the form of lower social security contributions.

But the Social Democrats have yet to reach a consensus on what to do with taxes in the first place. While some prominent party members contend the party should pledge tax cuts to the general public just like their conservative rivals, their more left-wing counterparts would rather have the wealthier citizens subjected to higher taxes by reintroducing the long-defunct wealth tax or by increasing inheritance tax. They, like the Greens, support the idea of higher government investment in such key areas as education or infrastructure.

In the meantime, the pro-business Free Democrats, a party historically committed to lower taxes, is calling for immediate tax cuts rather than delaying them until after the election. “The CDU-CSU and the SPD must pass tax cuts this year to be implemented at the beginning of next year,” FDP leader, Christian Lindner, said. The party, which was the CDU’s junior coalition partner from 2009 to 2013, additionally demands the abolition of the controversial “solidarity tax” introduced after reunification to help rebuild poorer eastern states. The proceeds from the much reviled “Soli” alone amounted to €16 billion last year, nearly as much as the entire budget surplus.

Even economists don’t have straightforward answers on how to cut taxes. For Marcel Fratzscher, the head of the Berlin-based Institute of Economic Research, the conundrum facing Ms. Merkel will be to decide who will be the main beneficiaries of the tax cut plans: entrepreneurs, pensioners or people with lower incomes.

“There is no ideal tax level – that’s a political decision to make,” said Clemens Fuest, the head of the Munich-based Ifo Economics Institute. His suggestion to Ms. Merkel’s CDU: cut taxes on mid-sized companies and raise the income level to be eligible for the highest tax bracket to €60,000.

 

Handelsblatt’s Donata Riedel covers German politics from Berlin. To contact the author: riedel@handelsblatt.com

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