ifo Institute: German Ministry of Finance’s Solidarity Tax Draft Bill Only the “First Step” towards Complete Abolishment
The ifo Institute has welcomed the German Ministry of Finance’s (BMF) proposal to abolish the solidarity tax for over 90 percent of taxpayers as a “first step.”
“However, the proposal fails to address not only high-earning managers and freelancers, but also large partnerships and corporations. In light of the fragile economy and intensifying international tax competition, this does not make sense. The complete abolition of the tax, which was introduced almost 30 years ago as a temporary measure, should therefore proceed as quickly as possible,” says Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys.
According to ifo calculations, the BMF draft bill would mean that a single person with a gross annual income of EUR 40,000 would pay EUR 332 less in taxes each year. If they earn EUR 60,000 gross, it’s EUR 669 less. For example, a single-income couple with no children and a gross income of EUR 80,000 would save EUR 724. But Peichl warns that “shifting and expanding the transition zone at which tax liability begins results in absurd leaps in tax rates. This could be designed differently. For example, you could prevent these leaps by introducing a tax-free allowance instead of an exemption threshold and provide relief for all taxpayers plus partnerships.”
ifo calculations indicate that completely abolishing the solidarity tax would have a positive labour supply effect of 133,000 full-time jobs. Under the BMF’s draft, it would still be 112,000. This could be increased to 121,000 full-time positions with a tax-free allowance of EUR 16,000.
Publication
Article: „Was bei einer Reform des Solidaritätszuschlags zu beachten ist“ by Maximilian Blömer, Luisa Dörr, Clemens Fuest, Martin Mosler, Andreas Peichl, Niklas Potrafke; in ifo Schnelldienst 16/2019.
Appendix (in German)
Beispielrechnungen für verschiedene Bruttoeinkommen (PDF Download)
