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In article no.80, we reported that the political deadlock which was blocking passage of the Government's fundamental tax reform proposals appeared to be insurmountable, but that at least a reduction in the solidarity surcharge was likely from 1998 onwards (see articles nos. 60, 70, and 80). New developments since then are summarised in this article, which is current through 16 December 1997.
1. Reduction of the solidarity surcharge
A two percentage point reduction in the solidarity surcharge effective from 1998 onwards was promulgated on 28 November 1997 and has entered into force. The solidarity surcharge will thus be reduced from the current 7.5 % of personal and corporate income tax assessed to 5.5 % starting next year. Since the proceeds of the solidarity surcharge go exclusively to the federal government, the consent of the Federal Council (Bundesrat) was not required.
The tax reduction is estimated to reduce annual tax revenue by DM 7.1 billion. No tax increases are planned to counterfinance the new measure. Instead, there will be a deferral of payments into the so-called "inherited burden sinking fund" (Erblastentilgungsfonds), a sinking fund for amortisation of debt assumed or incurred in connection with German reunification. Also, the Government plans to sell certain of its accounts receivable on the sale of real property.
2. Other developments
On 11 November 1997, new tax revenue estimates were released for 1997 and 1998. As expected, the estimates were revised downwards by DM 17.3 billion for 1997 and DM 22.4 billion for 1998. These figures refer to revenue losses to both the federal and state governments. The new corrections are in addition to the substantial negative corrections in May 1997 (see article no. 70, sec. 1). They came as no surprise, and the Government simultaneously announced plans to cover its share of revenue loss primarily by further deferrals in payments to the "inherited burden sinking fund".
In the course of the dreary month of November, plans were also announced to increase the statutory contribution to the national pension insurance plan (social security pensions) from 20.3 % of wages and salaries to 21 %. A further increase in the pension insurance contribution rate was declared unacceptable by politicians from most parties, including Chancellor Kohl himself. A consensus now appears to have emerged to raise the standard VAT rate from currently 15 % to 16 % effective 1 April 1998 and use the additional revenue to avoid increasing the pension insurance contribution rate. It will be recalled that, just a few months ago, the Social Democrats considered it feasible to reduce social charges, of which the pension insurance contribution is the most important, by one percentage point by increasing the VAT rate to 16 % (see article no. 70, sec. 2). Social charges (pension, health, nursing care, and unemployment insurance) are borne half each by employer and employee and currently amount to approx. 42 % of wages and salaries up to certain ceilings.
3. New tax reform negotiations
The negative tax revenue trend and the prospect of further increase in social charges have elicited calls for a new bi-partisan effort to reach a tax reform agreement in the near future and led to new negotiations between the Government and Opposition parties.
An initial round of negotiations failed with respect to tax reform in general but yielded a consensus on an increase in the VAT rate from 15 % to 16 % effective 1 April 1998. As explained above, the extra revenue would be used to avoid an increase in the social security pension contribution rate. According to present reports, a new round of negotiations on general tax reform will take place in early January 1998.
National elections will be held in Germany in the late autumn of 1998 (approximately one year hence).
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