AWhen Chancellor Olaf Scholz (SPD) was still Minister of Finance, he wanted to increase the top tax rate from 42 percent to 45 percent – and in return completely abolish the solidarity surcharge. However, Scholz said that he had already failed during the coalition negotiations in 2017 due to resistance from the CDU and CSU.
Should there be coalition negotiations between the SPD and the Union again after the next federal election in 2025, Scholz could have more success. Suddenly, the CDU is also thinking about raising taxes for top earners. This is what it says in an 18-page draft for the party’s basic program that the “Prosperity Commission” has drawn up under the leadership of economic politician Jens Spahn.
The increase in the top tax rate is to take place in return for two tax relief measures. On the one hand for the complete abolition of the solidarity surcharge, which must continue to be paid by top earners, investors and companies. On the other hand, the party wants to relieve small and medium incomes. “We want to relieve the hard-working middle class and therefore noticeably flatten the income tax rate,” the paper says.
In the future, the top tax rate will take effect later than before. From what income level exactly is not yet clear. “It’s still a debate,” said CDU tax expert Fritz Güntzler. Currently, the first euro is taxed at 42 percent with a taxable income of 62,810 euros.
The current Federal Finance Minister Christian Lindner (FDP) criticized the plans in an initial reaction. If you want to get into the middle class, you have to levy a top tax rate of 57 percent for counter-financing from a taxable income of 80,000 euros. “That would certainly be an attack on the economy,” he said at the annual reception of the banking association in Berlin. FDP Vice Johannes Vogel spoke of a “completely wrong way”.
The CDU rejects the criticism from the FDP. CDU party leader Carsten Linnemann considers an increase to be appropriate if, in return, the tax rate for the “working middle class” is reduced. “20 percent earn 2,500 euros gross per month,” Linnemann told the TV station WELT. These people need relief. “Personally, I think it’s only fair to say that those who earn a lot also have to pay a little more tax,” said the CDU politician.
How much the top tax rate should be increased is still open. Certainly not as clearly as Linder suggests. “The paper does not state that the increase in the top tax rate is intended to fully counter-finance the flattening of the middle class boom,” said Güntzler.
He assumes that the bottom line is that the CDU proposal will cost the state around 30 billion euros. Even for many top earners, the higher top tax rate does not mean an additional burden, since there is no solidarity surcharge on the other side.
Already in the last legislative period there were initial reform proposals from the CDU, which Güntzler had developed together with his CSU colleague Sebastian Brehm. The idea at the time was that the 42 percent top tax rate would only take effect at 80,000 euros to relieve lower incomes.
“Flattax” – the uniform inheritance tax for everyone
From a taxable income of 150,000 euros it should be 44 percent, from 250,000 euros then 47 percent. Calculations by the German Institute for Economic Research (DIW) and the Institute of German Economics (IW) assessed the relief for citizens – or the costs for the state – with this model up to 50 billion euros.
In addition to changing the income tax rate, the CDU wants to reorganize inheritance tax. In the future there will be a “flat tax”, i.e. a uniform rate for everyone. The previous system of inheritance tax is too “complicated, bureaucratic and prone to abusive tax structuring,” says the paper.
An inheritance tax rate of ten percent is aimed for on the entire transferred assets – including “sufficiently high tax allowances”. An interest-free tax deferral over ten years is planned for business assets. The Flattax proposal is similar to a concept that was raised by the Ifo Institute in Munich.
The criticism of the previous system is that because of too many exceptions in practice, those who inherit a lot pay relatively less tax than those who inherit little. According to an evaluation by the DIW, an inheritance cost between 50,000 euros and 100,000 euros in 2020 an average of 12.4 percent for taxes. Heirs who received more than 20 million euros only had to transfer an average of 9.7 percent.
The CDU also wants to change something about corporate taxation. Just recently, an evaluation by the Leibniz Center for European Economic Research showed that Germany is increasingly marginalized in international tax competition. Accordingly, the effective tax burden in 2022 was 28.8 percent. The CDU wants to cap profits that remain in the company to a “competitive level of a maximum of 25 percent”.
In order to strengthen wealth accumulation for old age, according to the CDU plans, profits from the sale of shares and share funds will be tax-free after a longer holding period – a period is not specified. Since 2009, newly purchased shares can no longer be sold tax-free after one year.
Tax reform would tear “huge holes” in the budget
The SPD is skeptical about the proposals. “The ideas contained in the paper for changing the income tax are vague,” said Michael Schrodi, spokesman for financial policy for the SPD parliamentary group.
This obscures the fact that the Union still wants to relieve high-income earners – by applying the top tax rates later and eliminating the solidarity surcharge altogether. “Overall, the proposed reform would tear huge holes in the public budget“, said the SPD politician.
In the reform ideas in the area of inheritance tax, Schrodi sees “the admission of one’s own failures of the past”. During its time in government, the CDU had always resisted closing the loopholes, especially for company heirs. The flat tax rate of ten percent is “significantly too low”. As long as the exact design and amount of the allowances are unclear, it is also unclear whether the Union is really serious, Schrodi summed up.
The AfD sees a concession in the CDU’s plans. “Fortunately, the CDU is getting closer to many positions in our basic program,” says financial politician Kay Gottschalk. Basically, the plans went in the right direction to finally relieve the middle class and middle class in a sustainable way.
The Left Party welcomes the proposed increase in the top tax rate. “Now Finance Minister Lindner is alone in the field,” said financial policy spokesman Christian Görke. The other proposals by the CDU resembled a tax savings program for the wealthy. He referred to the tax exemption for the sale of shares and the flat rate for inheritance tax.
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