Drop in bucket Germany to use windfall for tax relief, defense spending

A forecast of higher tax revenue gives Finance Minister Olaf Scholz room to respond to budget critics.
Buddy, can you spare a dime?

Finance Minister Olaf Scholz said higher-than-expected tax revenue will give the government some leeway to provide tax relief to the middle class and a boost to defense spending. The Social Democrat thus responded to criticism of his initial budget proposal last week, which did neither.

The semiannual estimate released Wednesday forecast an increase in federal tax revenue of €10.8 billion over previous estimates in the period up to 2022. State, federal and local governments together can expect €63.3 billion more tax revenue than forecast last fall. Compared with the expected federal revenue of €772.1 billion this year, the €10.8 billion extra revenue over a four-year period is in any case just a drop in the bucket.

The strong economy has led to calls for some tax relief to counter the personal and corporate income tax cuts in the United States. The Berlin government so far has resisted such appeals in order to maintain a balanced budget. Lawmakers have so far resisted the notion of outright tax cuts. Instead, they have discussed reductions in Social Security or unemployment payments.

The tax relief alluded to by Mr. Scholz was an adjustment in progressive tax rates to reduce the so-called “cold progression.” This happens when increased income pushes a taxpayer into a higher bracket that negates the increase, so that he or she is left with the same or even less after-tax income.

In addition, US President Donald Trump has berated Germany for falling short of NATO spending goals on defense, prompting Defense Minister Ursula von der Leyen to demand more funding than initially proposed. Mr. Scholz suggested he was open to spending at least some of the windfall on the defense and development ministries.

After years of penny-pinching on defense spending, the Germany military is in a parlous state, with many of its planes and submarines out of commission due to lack of maintenance. The country is spending only about 1.3 percent of GDP annually on defense, compared with a longstanding NATO target of 2 percent.

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Darrell Delamaide is a writer and editor for Handelsblatt Global based in Washington, DC. To contact the author: [email protected].