Debt an Issue for German Tax Cuts

October 14, 2009 Taxation in Germany  No comments

The newly elected German coalition featuring the Free Democratic Party (FDP) has refused to fund tax cuts for the nation with further debt increases.

Germany’s 27th of September election saw creation of a Christian Democratic Union (CDP), Christian Social Union (CSU) and FDP coalition. While campaign promises of all parties have maintained that tax cuts would be a priority for the coalition, contentions arisen as to the matter of their funding.

The newly formed coalition will undergo a final round of negotiations regarding the party’s vastly different tax cut promises, throughout the weekend beginning on the 17th of October. CDP has campaigned for tax breaks equivalent to approximately €15 billion, with no specific mention of timing or fund sourcing. Conversely, FDP had previously voiced intentions of €35 billion worth of cuts, with a great emphasis on their rapid implementation. Mixed into the foray of differing opinions, FDP announced on the 13th of October that they would not be willing to even consider any tax cuts funded by an increase in Germany’s debt levels.

All parties involved have admitted that intended cuts could see difficulty materializing, due primarily to Germany’s ailing economy. According to an October 13th statement by the German Finance Ministry, the German government has seen a 7.4% drop in tax revenue collection for the calendar year, compared to the previously forecast 5.8% decline. FDP has already hinted that they might reduce their tax cut intentions accordingly.

The coalition has agreed to a reform and simplification of Germany’s tax brackets. Despite FDP’s intentions, these will be phased in over a four year period. Tax cuts will follow a similar time frame, with moderate cuts being instated in 2011 and more drastic reductions in 2012 and 2013.

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