Fiscal 'populism' German tax relief in 2019 leaves companies twisting in the wind

The first real tax reform in 10 years favors low earners but discriminates against corporations, putting Germany at a competitive disadvantage.
Quelle: Picture Alliance
They’ve just seen their tax notice for 2019.
(Source: Picture Alliance)

It turns out that one advantage of Germany’s grand coalition is that each of the mainstream parties in the government has a tax handout for its supporters.

Chancellor Angela Merkel’s conservative Christian Democrats pledged more tax relief for families and have followed through this year with an increase in child benefit payments by €10 a month per child. Thoughtfully, the measure includes a corresponding increase of the child tax exemption so that taxes don’t eat up the extra benefit.

Social Democrats, the junior partners in the coalition, promised relief for low-income workers and delivered on that as well. The threshold for paying pay the full employment tax, which weighed relatively more heavily on them, was raised to a wage of €1,300 per month from €850.

No tax cuts for fat cats

These are among changes in the tax law going into effect this year — the first major reform in 10 years. What’s missing, however, is any relief for corporations, as German “tax populism” continues to dismiss any relief for companies as a benefit for capitalist fat cats.

It is an attitude that risks severe consequences for the German economy as its major trading partners slash their own corporate taxes. The US, Britain, France, Sweden and Belgium have all cut company taxes, or plan to do so.

Yet Olaf Scholz, Germany’s finance minister, has argued that Germany seems to be doing just fine as its exports continue to be strong without making any competitive cuts. Berlin shouldn’t do anything to stoke this tax competition, he says. That is an argument as counterintuitive as if Opel would say it’s not going to match emissions reductions at Volkswagen or Toyota to avoid fueling competition.

The result is that Germany will soon be the site with the highest tax burden for companies, losing its attraction as a target for direct investment. The lack of tax incentives for research, for instance, is quietly prompting big German companies to locate more research and development facilities abroad. This trend is under the radar but has significant long-term consequences.

High taxes lead companies to employ accounting tricks to avoid paying them, and this in turn reinforces suspicion in the public that corporate magnates are big tax evaders who need to be tracked down and punished. But voters need to realize that tax relief for companies, which encourages investment and job creation at home, benefits workers as much as capitalists.

Discrimination against high earners

The personal income tax benefits in this year’s reform package are skewed in favor of the low and middle-income taxpayers. The standard deduction is being raised to €9,168 from €9,000. Tax brackets have been adjusted for inflation to avoid the creeping tax increase from moving into a higher bracket.

The caps for employment tax contributions will be raised, a change that doesn’t affect low earners but increases the burden for high earners.

This discrimination against high earners comes to a head with the so-called solidarity surtax, originally imposed to help pay the costs of German reunification. The controversial surcharge is supposed to be eliminated for 90 percent of taxpayers under the current government, with only high earners continuing to pay it.

Christian Democrats decided last month at their party convention to seek complete elimination of the surtax, providing relief for high earners. Critics have complained for some time that it is a breach of confidence to keep a tax that was billed as temporary when it was introduced nearly three decades ago. Moreover, it could even be considered unconstitutional if it is extended beyond the end of this year when the solidarity pact for reconstruction of East Germany runs out.

Finance Minister Scholz, a Social Democrat, will have to draft a bill this year for the partial elimination of the solidarity tax and it will be interesting to see if he keeps penalizing high earners.

Martin Greive is a Berlin correspondent for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Today. To contact the author: [email protected].