Reported from the source

Quick summary: Germany’s Union parties (CDU/CSU) are reportedly showing a new willingness to consider an increase in the top income tax rate. This shift could enable a major tax reform aimed at significantly relieving middle-income earners and abolishing the so-called ‘Mittelstandsbauch’ (middle-income bulge). The Union’s openness is contingent on the measure being part of a fundamental reform that provides substantial relief for most taxpayers. The development follows a compromise proposal by tax expert Stefan Bach, which suggests raising the top tax rate from 42% to 49% while completely eliminating the solidarity surcharge and easing the burden on middle incomes.

In a significant development in Germany’s ongoing tax debate, the Union parties (CDU/CSU) are no longer categorically ruling out an increase in the top income tax rate. This newfound flexibility, reported by Handelsblatt from parliamentary group and party circles, could pave the way for a comprehensive tax reform, provided the measure is integrated into a package that offers substantial relief for the majority of taxpayers. The discussion has been fueled by a compromise proposal from Stefan Bach, a tax expert at the German Institute for Economic Research (DIW). Bach’s concept aims to eliminate the ‘Mittelstandsbauch’ – the steep increase in tax burden for middle incomes – and completely abolish the solidarity surcharge. In return, he proposes raising the top tax rate from 42% to 49%, applying it from an income of €90,000 (currently €69,879). Union politicians have reacted positively to Bach’s ideas. Fritz Güntzler (CDU), financial policy spokesperson for the Union parliamentary group, told Handelsblatt that the concept goes ‘in the right direction’ and is suitable for initiating a discussion on urgent income tax reform, emphasizing the need for ‘tangible relief for lower and middle incomes.’ Florian Dorn, a CSU financial politician, also sees the concept as a potential basis for coalition discussions on a ‘courageous income tax reform,’ though he considers Bach’s proposed 49% top rate ‘a bit too high’ or applied ‘too early.’ The Union’s shift is driven by political realities: Finance Minister Lars Klingbeil (SPD), according to the source, is expected to insist on partially financing tax cuts given the difficult budget situation, and the Social Democrats are unlikely to support a reform that primarily benefits high earners. The coalition agreement itself calls for tax cuts ‘for small and middle incomes.’ Bach’s calculations suggest that despite a higher top tax rate, 98% of taxpayers would see relief totaling around €20 billion. Only the top two percent of earners – those with more than €130,000 in taxable income annually – would pay more. However, the overall plan would still result in a net deficit of approximately €15.5 billion per year for the state. Regarding financing, Bach suggests inheritance or wealth taxes, but Güntzler rejects these, citing economic uncertainty. Instead, Güntzler proposes budget savings, the reduction of tax breaks, or a moderate increase in VAT, noting that a one-percentage-point rise could generate around €15 billion. The complete abolition of the solidarity surcharge, another key component of Bach’s plan, receives broad praise from Union politicians as ‘long overdue,’ and while the SPD has previously opposed abolishing the remaining Soli, they might agree in combination with a higher top tax rate. A significant concern for the Union is the impact on Personengesellschaften (partnerships), which constitute many small and medium-sized businesses, particularly in the skilled crafts sector. For these entities, income tax effectively serves as corporate tax. Jörg Dittrich, President of the German Skilled Crafts Association, warns that a higher top tax rate would be a ‘tax increase for the skilled crafts,’ potentially withdrawing much-needed investment funds during a crisis. Economist Tobias Hentze from the German Economic Institute notes that the top tax rate currently affects entrepreneurial activities significantly. Güntzler stresses that any reform must include relief for partnerships, possibly by improving their option to be taxed like Kapitalgesellschaften (corporations), and calls on ‘Finance Minister Lars Klingbeil (SPD)’ to present concrete proposals.

Source: www.handelsblatt.com