Germany Passes 2018 Budget, Plans Reunification Tax Phaseout

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By Jabeen Bhatti

Germany’s reunification tax will be dismantled for 90 percent of taxpayers starting in 2021, according to the financial plan the German Cabinet adopted July 6.

The move will “benefit craftsmen and small and medium-sized companies,” a spokeswoman from the Ministry of Finance told Bloomberg Tax in a July 6 email. The financial plan is for up to the year 2022.

The tax is a controversial 5.5 percent levy on income, withholding, and corporate tax that’s been used to bolster infrastructure in the formerly communist East German states.

Called the solidarity surcharge, it was instituted in 1991 after German reunification to support reconstruction efforts in the economically disadvantaged, formerly Soviet East German states. It brought in brought in 17.45 billion euros ($20.5 billion) in 2017.

The phaseout of the tax was included in the German government’s finalized coalition agreement. The government hasn’t yet given additional details about the remaining 10 percent of taxpayers who will continue to pay the tax.

In a May policy paper analyzing the government’s proposals for this legislative period, the Cologne Institute for Economic Research wrote that share of the remaining contribution for “self-employed persons, partnerships and corporations would rise to around 60 percent as they would in many cases not benefit from the exemption limit.”

Budgets Pass

The German Cabinet also adopted the 2019 budget, which was included in its financial plan. The same day, the upper house of the German Parliament, the Bundesrat, passed the 2018 federal budget.

The 2018 budget was long delayed, and was passed the last day that the parliament meets before summer recess. The delay was a result of the almost six-month battle Chancellor Angela Merkel faced in forming a coalition government after September’s elections, Minister of Finance Olaf Scholz said at a July 6 press conference.

The budget for 2019, as well as the financial plan up to 2022, will be first discussed by Parliament in mid-September, according to a July 6 government statement. The government expects to conclude the bill in mid-December.

The 2019 budget passed by the Cabinet plans 356.8 billion euros in expenditures, most notably for huge budgetary increases for development and defense.

Now that the 2018 budget has passed both houses of Parliament, it will go to the German president to be signed into law over the next few weeks.

’Looking Forward’

The 2018 budget swelled to 343.6 billion euros, a 14.5 billion euro increase from 2017, according to parliamentary documents.

New expenditures include the introduction of a child subsidy scheme ( Baukindergeld) in which families with incomes of less than 75,000 euros per year can receive up to 12,000 euro per child over the course of 10 years with the purchase of a house or apartment, according to the budget.

The new scheme will cost the state 3.8 billion euros by 2022, according to estimates from German Taxpayers’ Federation.

The passing of the budget proposals shows that the government is “capable of acting” quickly to lay the framework for tax and financial policies that are “forward looking, just and responsible,” Scholz said.

Despite the increased investments, the budget adheres to the so-called “schwarze Null” principle of creating no new debt for the fifth year in a row, a mantra spearheaded by former Minister of Finance Wolfgang Schäuble.

No Balance

The government’s financial plans drew criticism from Reiner Holznagel, president of the German Taxpayers’ Federation, who said in a July 4 statement that the budget stands for “excessiveness,” and added that there are no measures to dismantle existing debt in the plans up to the year 2022.

“The ’schwarze Null’ only exists on paper,” he said. “In reality, the ’schwarze Null’ is dead.”

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bloomberglaw.com

To contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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