Grand Coalition Tax Plan in Germany Leaves Many Wanting More

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By Jabeen Bhatti

Germany’s conservative Christian Democrats have finalized a coalition agreement with the left-leaning Social Democrats, possibly leading to a new government next month with lackluster tax policies, economists and attorneys told Bloomberg Tax.

The new program—finalized Feb. 7—would include more investment into digital infrastructure and social programs, a dismantling of decades-old tax treatments and a full-throated embrace of harmonization of European tax regimes, according to the 177-page document reviewed by Bloomberg Tax.

Still, while the two parties of this third iteration of the so-called Grand Coalition under Chancellor Angela Merkel have dubbed the agreement “an awakening for Europe—a new dynamic for Germany,” economists and tax attorneys believe the agreement lacks the ambition needed for widescale tax reform to spark private investment in a time of unprecedented German prosperity.

“Economically speaking, it has all the right ingredients,” Carsten Brzeski, chief economist at ING-DiBa in Frankfurt, told Bloomberg Tax Feb. 7. “But with the numbers, there’s still a lack of high ambition.”

With the policy details of the agreement now set, it will be put up for a vote by the Social Democrats’ 460,000-plus members in the coming weeks. Their approval is needed for the agreement to be finalized, and for the coalition government to get to work.

’True Compromise’

“With regard to the ethical principles of the party, the coalition agreement proves to be a true compromise,” Lothar Binding, the Social Democrats’ spokesman for fiscal policy in the Bundestag, told Bloomberg Tax Feb. 7 of the Grand Coalition’s final agreement.

Social Democrats settled for a gradual dismantling of the nation’s solidarity surcharge in return for walking back calls to create a new tax bracket for Germany’s highest earners with a net income of more than 76,200 euros ($94,465.90) per year to be taxed at 45 percent, up from the current 54,000 euros ($66,149) taxed at 42 percent.

The surcharge is a 5.5. percent levy on income tax, capital gains and corporate tax instituted after German reunification in 1990. It netted $20.35 billion in 2017, according to statistics from Germany’s finance ministry.

According to the coalition agreement, the government will begin gradually rolling back the surcharge in 2018, with 90 percent of taxpayers free from paying the levy by 2021—a tax savings amounting to 10 billion euros ($12.3 billion) for middle and low earners, with the top 10 percent still required to pay.

For their part, the Christian Democrats were able to secure promises to adhere to a balanced budget without creating new debt, while also halting any changes to the current system of domestic taxation, according to the agreement.

The Christian Democrats’ parliamentary speaker for tax and financial policy was unavailable for comment.

Not a ‘Change of Course’

The coalition agreement also envisions a slate of state investments amounting to 46 billion euros ($56.4 billion) into digital and traditional infrastructure, social housing and child care, including the savings from dismantling the solidarity surcharge.

Such investments, however, only provide enough for one to be “cautiously optimistic” that Germany will be able to take advantage of its current economic health to reform its tax regime and secure economic sustainability for the future, Brzeski said.

In November, Germany’s Working Party on Tax Revenue Estimates, an advisory council for the federal government, estimated that total German tax revenue for 2017 would reach 734.5 billion euros ($901.6 billion), a figure that will shoot up to 889.6 billion by 2022. The group also estimated in its report that Germany’s current budget surplus of $17.5 billion could double by 2022.

“I would’ve liked to see more numbers—bigger numbers, more investments. Right now, they’ve said that all the matters will cost something between 40 to 45 billion euros over four years. That’s not a lot,” Brzeski told Bloomberg Tax.

Lisa Paus, the Green Party’s spokeswoman for financial policy in the Bundestag, told Bloomberg Tax in a Feb. 7 email that while the priority to invest in such programs is correct, it’s not enough. The agreement is “not a real change of course,” she said.

“Too little is planned for climate protection, digitization and apartment construction, thus postponing the necessary socioecological modernization of society,” she said.

In defense of the investment package, Binding said that “one has to be very careful not use the current economic situation,” with low unemployment, good growth, and health foreign trade balances to justify structural change.

“Structural changes on the expenditure side always need structural safeguards on the revenue side,” he said.

Missed Opportunity

Critics of the agreement also point out that the reliance on state investments, instead of incentivizing private investment, means there’s likely to be little worthwhile movement on tax and financial policy over the next few years.

“It’s problematic that additional investments are heavily controlled by the state,” Clemens Fuest, president of the Ifo Institute for Economic Research in Munich, told Bloomberg Tax in a Feb. 7 email. “There is no promotion of private investment. Although the agreement speaks of the importance of industry and the middle class, companies receive no tax relief and no new investment incentives.”

The result of that is that Germany may miss an opportunity for reforming its tax treatments and economy to secure long-term prosperity and remain competitive for business, Oliver von Schweinitz, a partner with GGV law firm in Hamburg, told Bloomberg Tax Feb. 6.

“I think at the very least, it is missing the possibility for reform,” he said. “One thing that’s been debated for decades is the abolition of trade tax, and we still have trade taxation. That makes things so complicated. I don’t think this is an agenda for reform.”

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bloomberglaw.comTo contact the editor on this story: Penny Sukhraj at psukhraj@bloombergtax.com

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