German lawmakers see scope to cut tax 'bracket creep' around 2016

Mon Apr 28, 2014 12:57pm EDT

Related Topics

* Strong tax revenues, economic growth clear way for cuts

* Critics say bracket creep "picks wage-earners' pockets"

* Germany unusual in not indexing its tax brackets

By Erik Kirschbaum

BERLIN, April 28 (Reuters) - Germany, flush with surging tax revenues and strong economic growth, could lower income taxes in 2016 by eliminating "bracket creep", according to a growing number of voices in Angela Merkel's right-left coalition.

Lawmakers from the chancellor's Christian Democrats and the centre-left Social Democrats (SPD) said there should be scope for doing away with a tax code rule that income tax brackets are not adjusted for inflation.

Unlike major economies such as the United States, Britain and France, thresholds in Germany's progressive tax system are not automatically adjusted - something the Organisation for Economic Cooperation and Development (OECD) has urged it to address via the introduction of index-linked tax brackets.

Critics complain the current system "picks wage-earners' pockets" by hoisting them into higher tax brackets as their earnings rise. But government budgets have long relied on the extra funds it brings - up to four billion euros a year.

Increasing numers of conservative and SPD politicians now see scope to reduce it with the federal government on track for a balanced budget in 2014 for the first time in 40 years.

"It's conceivable that we could have a reform next year or in 2016," said Volker Kauder, CDU parliamentary floor leader.

The latest talk of cutting "cold progression", as it is called, was fuelled by Finance Minister Wolfgang Schaeuble telling Der Spiegel magazine this weekend he would not block tax reductions if there were room in the budget.

COALITION PARTNERS AGREE

Merkel's SPD coalition partners have until now insisted any cuts must have matching financing. But their leader, Economy Minister Sigmar Gabriel, said on Monday cutting cold progression "ought to be possible within the next four years due to the rising tax revenues".

The clamour for tax relief has grown since last week's news that the tax take hit a record 55.36 billion euros in March.

"We need to take advantage of any and all available financial breathing room ... for cutting 'cold progression'," said Mike Mohring, a CDU leader from Thuringia coordinating financial issues between the federal and state governments.

Bild newspaper reported on Monday that CDU leaders are working on a plan to eliminate bracket creep gradually in a series of small annual steps linked to the inflation rate.

"Cold progression could be eliminated in two steps - on January 1, 2016 and on January 1, 2018," Christian Baldauf, a CDU executive board member, told the newspaper.

Many conservatives would like to see the tax cut take effect in 2016 ahead of important regional elections in states that the SPD or their erstwhile Greens allies rule: Baden-Wuerttemberg, Rhineland-Palatinate, Berlin and Mecklenburg-Vorpommern.

Der Spiegel magazine calculated that a single person who earns 40,000 euros per year and gets a 2 percent pay rise could see net income actually fall due to bracket creep, which would result in an increase in taxes of 3 percent. (Reporting by Erik Kirschbaum; Editing by Stephen Brown and Tom Heneghan)

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