Merkel promises tax break of €6bn

GERMANY:THE RULING coalition of German chancellor Angela Merkel has agreed to a mini-income tax reform, promising relief worth a reported €6 billion to taxpayers.

As the rest of Europe saves, a finance ministry official said yesterday that the average German can look forward to an extra €25 a month in their pocket.

“This is a step towards more fairness in taxes, but it also strengthens growth in Germany,” Dr Merkel said. The move has been criticised by financial analysts as a political rather than financial deal.

German opposition leaders have dismissed the reform as an attempt to end months of wrangling among the ruling coalition while delivering a kiss of life to Dr Merkel’s struggling coalition partners, the Free Democrats (FDP). For two years Dr Merkel had blocked the FDP’s general election tax cut pledge, worth €24 billion.

Having her coalition partner flatlining in polls was increasingly perilous for the German leader, analysts suggest, thus her consent for a mini reform, beginning in the next election year.

The coalition parties said yesterday the effective tax cut would be financed by increasing tax-free allowances in two stages, in 2013 and 2014, by a total of €350.

However, it was unclear yesterday if the tax cuts would ever be implemented: they are unlikely to pass the Bundesrat, the upper house representing the federal states, where the chancellor lacks a majority.

“It remains to be seen whether voters will register this benevolently at the ballot box,” said Gert Wagner, head of the German Economics Institute in Berlin.

“I expected no economic effect, such as through an increase in private consumption. Macro-economically, these minimal tax cuts will evaporate.”

Tax analysts said government talk of a tax cut was exaggerated. “The end effect for an individual is extremely minimal,” said tax analyst Thomas Eigenthaler to national broadcaster ZDF.

Markus Deutsch, spokesman for the Association of German Tax Advisers, said the government had done little more than negate the effect of inflation.

“The individual will barely feel any relief,” he said. “This is no tax cut, rather a non-tax hike.”

In Berlin, opposition parties attacked the tax plans as both “measly” and expensive, even a potential breach of the “debt-brake” provision in the constitution to force a balanced federal budget.

“The benefit for taxpayers is measly, the cost to the budget considerable,” said Andrea Nahles, general secretary of the opposition Social Democrats. “We cannot imagine supporting this in the Bundesrat.”

As well as its €6 billion tax cut plan, the coalition leaders postponed a plan to introduce a toll for private cars on Germany’s motorways and instead announced an additional €1 billion infrastructure investment plan.