Government in the money Germany's Tax Windfall

Thanks to high employment, Germany's government is set to receive an additional €7 billion to €8 billion in taxes this year.
The government is set to receive a bonus.

For years, German finance ministers dreaded the date when tax revenue estimates were announced.

With every forecast, experts revised their estimates downward, especially during Hans Eichel's tenure from 1999 to 2005. In 2001, for example, tax revenues were projected to be about €530 billion ($590 billion) in 2005, but only €452 billion found its way into the treasury.

The tide turned a few years ago.

With more people employed and spending their earnings, tax revenues have been steadily rising. When The Working Party on Tax Revenue Forecasting, an independent advisory council of the Federal Ministry of Finance, begins three days of discussions on Tuesday in the southwest city of Saarbrücken, it won’t be a question of whether forecasts should be adjusted upward, but by how much.

The government’s estimates for 2016 to 2019 assumes another €7 billion to €8 billion per year more than the previous tax revenue estimate.

A report from the finance ministry will serve as a guideline in the decision. Sources have told Handelsblatt the report predicts an increase of €7 billion to €8 billion in tax revenues this year based on the strong results of last year and a continuing strong economy.

Tax revenue forecasting experts always make their calculations based on government economic forecasts. Sigmar Gabriel, Vice Chancellor of Germany and Minister for Economic Affairs and Energy as well as head of the center-left Social Democratic Party of Germany (SPD), recently raised projections for real growth to 1.8 percent for 2015.

Since most taxes are based on nominal variables such as income levels and prices, development of the nominal gross domestic product, which otherwise receives little attention, becomes significant for tax revenue forecasters.

Mr. Gabriel’s economists now predict a 3.8 percent increase in GDP in 2015 instead of the previous estimates of 3.0 percent. Gross wages and salaries, which are critical to tax revenues, are expected to rise by 4.0 percent instead of the previous estimate of 3.7 percent.

Strong economic growth also is expected in the medium term. Economic performance is likely to be up at least €40 billion in 2019, reaching €3.42 trillion.

The government’s estimates for 2016 to 2019 assume another €7 billion to €8 billion per year more than the previous tax revenue estimate, a source said. Instead of the expected €760 billion, the state will likely rake in €768 billion. Compared to 2013, taxpayers and businesses will be paying almost 25 percent more to the tax office.

On Thursday, the Federal Employment Agency (BA) presented good news on labor market data. Seasonally adjusted, unemployment went down by 8,000 compared to the previous month. At 2.8 million, there were 100,000 fewer people registered as unemployed compared with the previous year. BA Chairman Frank-Jürgen Weise said employment numbers are encouraging, adding, “The number of jobs being reported is also continuing to develop positively.”

It’s only wage and sales taxes dependent on the labor market that are soaring. The real estate boom also is bringing in strong increases in income to the German federal states. There was a 16 percent increase in property transfer tax revenues in the first quarter.

Inheritance and gift tax revenues also grew dramatically by 27 percent. It appears many wealthy citizens fear higher tax burdens through the looming inheritance tax reform and are looking to benefit from the current law by making their gifts, donations and endowments sooner rather than later.

Only the withholding tax on capital gains income is not doing well, though considering the mini interest rate, a drop of 10 percent could almost be considered moderate. The finance ministers will be able to cope.


Axel Schrinner writes about tax and finance policy for Handelsblatt. To contact the author: [email protected]