Merkel gives way on tax reform, ahead of national congress
German Chancellor Angela Merkel will suggest a steeper cut to Germany’s so-called “solidarity tax” than originally planned by her coalition government, party insiders say.
The move may be an attempt to placate the pro-business wing of her Christian Democratic Union party, ahead of the annual congress next month, when a new party leader will be elected.
If it goes forward, the amendment will amount to tax relief of billions for income earners in Germany. But it is also another reason for the partners in the coalition government to get up in arms.
Ever since Germany was reunified in 1990, taxpayers who earn above a certain amount have contributed an additional 5.5 percent income tax towards the costs of reunification.
The tax is called the solidarity surcharge, or “Soli,” and adds up to around €19 billion ($22 billion) annually.
Business groups have long pushed for the abolition of the solidarity surcharge, but more than two decades later, the Soli is still in place. And that is even though the huge program of federal help for former East German states has largely been wound down.
During coalition negotiations to form the current German government, Merkel’s Christian Democrats, or CDU, and their Social Democratic, or SPD, coalition partners agreed that the Soli would be eliminated for anyone earning below €61,000. That’s some 90 percent of those eligible to pay. Meanwhile, top earners will continue to pay the full 5.5 percent, which is levied on the amount of income tax already paid, not on the full gross income. Effectively, the rate is around 1.5 percent of total income, including stock gains, dividends and interest rate payments on savings.
Critics say this in effect converts the solidarity tax into a permanent supertax on high-income earners. If the planned amendment went ahead, the government would lose around €10 billion of the €19 billion they get every year in Soli taxes. The remaining €9 billion would continue to come from the top 10 percent of income earners, who currently pay almost half of the Soli.
That’s not good enough for CDU politician Carsten Linnemann, who heads a powerful pro-business committee within the party. He told Handelsblatt he plans to submit a proposal at the upcoming party conference to get rid of the Soli altogether. “Nobody can understand why we are still burdening the highest income earners, tradesman and professionals with the Soli after promising for 20 years, that the Soli will disappear after solidarity measures in the former East end,” Linnemann told Handelsblatt.
In the past, Linnemann has proven successful in forcing the Chancellor to pass tax-cutting measures.
Battle lines for the coalition partners
Merkel recently made sympathetic noises about getting rid of the tax altogether. But then, during negotiations with the SPD to form the current government, she compromised with her center-left coalition partners, promising to focus the benefits of any Soli reform on lower earners.
The SPD doesn’t want to abolish the Soli completely and has no intentions of playing along with Linnemann’s suggestion. So once again, the country’s so-called grand coalition government is heading for a showdown between the center-right Christian Democrats and the center-left Social Democrats.
Getting into position
The fact that high-level negotiations are happening in this area also reflects the jockeying for position going on within the CDU, ahead of the annual party congress in early December. Members will elect a new party leader to replace Merkel, who announced last week that she was stepping down as CDU leader and would not stay on as Chancellor past 2021. A change of direction within the party is possible and some analysts believe the CDU will return to conservative, pro-business roots.
Three main candidates are now openly campaigning for leadership, including the strongly pro-business Friedrich Merz.
Interest groups and individual parliamentarians within the CDU, including those in favor of tax reform, are doubtless preparing to exact a price for their support.
Tax reform campaigners have long maintained that Germany is heavily overtaxed and Joachim Lang, the head of the Federation of German Industries, the country’s leading industrial organization, told Handelsblatt that many European countries were cutting taxes in response to US President Donald Trump’s radical fiscal policies. That includes Belgium, France, Greece and the UK, he noted.
Abolition of the solidarity surcharge tax would be an excellent first step for Germany, Lang argued.
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