On September 26, the Bundesrat rejected the bills for a tax amnesty and for the 2004 budget measures and severely criticised the trade tax reform and the 2004 federal budget.

Three tax bills and the federal budget were four of the items on the Bundesrat's crowded agenda for its regular sitting of September 26. None of the four were accepted. Two, the Tax Honesty Encouragement Bill with its black cash tax amnesty and the 2004 Budget Measures Bill with its acceleration of the 2005 income tax rate cuts were rejected outright, leaving the government with the alternatives of calling on the Reconciliation Committee to seek a compromise, or of dropping the bills altogether. The Bundesrat severely criticised the 2004 budget and asked that it be reworked, and also put on record its unwillingness to accept the Trade Tax Reform Bill in its present form.

The Tax Honesty Encouragement Bill would have allowed taxpayers to legalise their assets from previously undeclared income against a simple report of the amount and payment of a 25% lump sum in full settlement of all tax liabilities. The Bundesrat's rejection was based on the following considerations:

  • It's effect on tax honesty was unclear. Some might take advantage of the amnesty, but others might feel encouraged to cease declaring current income on the assumption that the next amnesty would soon come (the last was only 15 years ago). The 25% lump sum was far less than the tax originally saved, even disregarding the interest normally due on back taxes.
  • It would undermine future tax audit efforts, particularly in the field of banking, to bring evaders to justice.
  • It might be seen as offering a good money laundering opportunity for organised crime.
  • The lack of detail to be required in the return would enable fraudulent taxpayers to eliminate virtually their entire risk of future discovery against only a partial payment now. Whatever the authorities might discover in the future would always have been included in the amnesty return, other than in the unlikely event of an evader's entire misdeeds becoming known at one and the same time.

The 2004 Budget Measures Bill sought to bring the 2005 income tax cuts forward by one year to 2004. It would also have reduced the relief available on the costs of longer journeys to work and have withdrawn the "6 months" concessionary rule for first year's depreciation. Its other measures would have been of less consequence to business. However, it was these other measures, particularly the cut-back on housing subsidies, that were decisive for the Bundesrat's refusal to adopt the bill. Despite this, the Bundesrat claimed it welcomed the income tax cuts, notwithstanding its withering comments of half an hour earlier on the planned deficit in the federal budget.

The Bundesrat saw the Federal budget as threatening a serious breach of the Maastricht criteria for the third year running. Although the planned deficit was shown at a bare 3%, this was probably understated, as the income items were less certain than the expenses. Somewhat inconsistently, the Bundesrat specifically objected to some of the cost cuts and to the lack of "visionary" investment. It resolved to forward "critical comments" to the government with the request that the budget be reworked.

The debate on the Trade Tax Reform Bill was preliminary only. Rejection by the Bundesrat was therefore not final, at least not in the formal sense. The Bundesrat made, however, its dissatisfaction with the present draft very clear and called on the government to revise its thinking. The aim of any reform must be to give local authorities revenue security without impinging on their financial autonomy. At the same time there should be a fairer distribution of burdens leaving local communities more of their own tax revenue to spend on their own purposes. In its call on the government, the Bundesrat referred to its own suggestion for an emergency programme in support of local authorities. Essentially, this meant reducing the federal share in trade tax revenue whilst increasing the local share in VAT. The Bundesrat also resolved to debate in its own committees a rival bill proposed by Schleswig-Holstein.

The remaining sessions this year of the Bundesrat are on October 17, November 7 and 28, and December 19. All outstanding matters must be resolved at one of those sittings if entry into force for 2004 is to be assured. Apart from the bills rejected today, the Supplementary Bill to the Tax Concessions Pruning Act - the so-called "second basket" - with its all-important shareholder-debt measures and the Transfer Pricing Documentation Decree call for urgent attention. Up to now, these two documents have been depicted as being politically uncontroversial, but ....................

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