BERLIN (Reuters) - German Chancellor Angela Merkel’s government agreed on Wednesday to exempt most taxpayers from the solidarity tax that was introduced after the county’s reunification.
Under a draft law drawn up by Finance Minister Olaf Scholz, some 90% of taxpayers will from 2021 no longer be subject to the 5.5% levy, which has been added to income tax. The amount payable will be reduced for a further 6.5% of taxpayers.
The tax has been used primarily to support economic development in the poorer eastern states that made up the Communist German Democratic Republic until the fall of the Berlin Wall in November 1989.
“Today is a significant day on the road to the completion of German unity. The costs of reunification have in large part come to an end,” Scholz said in a statement.
Merkel’s government has incurred no new debt since 2014 thanks to an unusually long growth cycle, record-high employment, robust tax revenues and low interest rates.
However, with fears of recession rising after economic contraction in the second quarter, calls are increasing at home and abroad for the government to provide extra fiscal stimulus.
Only top earners will still have to pay the tax in full. Scholz has said the government will look at that in the future, but he made clear in an interview with ARD television that now was not the time for the richest to get a tax break.
In their 2018 coalition deal, Merkel’s conservatives and Scholz’s Social Democrats (SPD) agreed to cut the tax burden for middle and lower earners.
Tweaks to the draft law - which has been hotly disputed within the government - are likely as it goes through parliament.
Conservatives, led by Economy Minister Peter Altmaier, want the solidarity tax - originally introduced as a temporary measure to invest in infrastructure in the former GDR but then also used for other purposes - to be totally abolished by 2026.
The finance ministry said the changes will result in around 10 billion euros ($11.1 billion) in tax relief for citizens from 2021, rising to around 12 billion euros by 2024.
Last year, the tax contributed 18.9 billion euros to the federal budget, said the ministry.
Reporting by Christian Kraemer; Writing by Madeline Chambers; editing by John Stonestreet