The plans, which would deliver tax relief of €16 billion starting in 2012 while streamlining income taxes to just five brackets, now appear to have a reasonable chance of going ahead, given the generally positive reception from senior coalition partners.
The FDP were forced to back away from earlier, bolder promises of tax reform because of the massive debt Germany has been forced to take on owing to the recession. Angela Merkel's Christian Democrats and their Bavarian sister party, the Christian Social Union, have been generally more wary of tax relief.
But the FDP's compromise plan has been generally well received.
Hans Michelbach, chairman of the CSU's small business committee, said the FDP had ''accepted that the room to move on tax cuts is slender because of the recession and finance crisis.”
He said it was now necessary to wait for the May tax assessment – the twice yearly calculation by the Finance Ministry on the government's future finances – before further details could be discussed, including tax brackets.
The plan aims to get rid of “cold progression,” whereby inflation pushes people into higher tax brackets, hiking up the total tax they pay unless the bracket thresholds are adjusted.
Michelbach agreed tax reform would have to address the burden on medium-sized businesses and so-called cold progression. Under the present system, the tax man profits disproportionately from every pay rise, he added.
CDU parliamentary leader Volker Kauder told the Passauer Neue Presse the coalition was now well on the way to a “sensible tax plan.”
The coalition partners have agreed there will be no further tax relief in the next year, and the timetable depends on how the economy and the government's finances develop, he said. The coalition will clarify its plans for tax relief before the summer parliamentary recess in the course of adopting the 2011 federal budget, he said, which means the direction would be known to voters before the crucial May 9 election in North Rhine-Westphalia.
“It is therefore still the case, that we will outline the direction before the North Rhine-Westphalia state election,” he said.
However other conservative leaders had doubts about the FDP's plans. Saxony's CDU Premier Stanislaw Tillich told the Hamburger Abendblatt it was unclear precisely what impact the FDP plan would have on the government's bottom line.
“We therefore must first of all carefully examine the FDP plan,” he said. “Only after close study can we say whether it can provide a basis for further negotiation.”
The German Chambers of Commerce and Industry (DIHK) welcomed the tax plan. It admitted the plan meant cuts to expenditure from 2011 onward would be unavoidable.
This was backed by an expert assessment that figured the economic stimulus generated by the tax cuts would make up for about only half the lost revenue.
The RWI-Essen Institute found that stimulation of private consumption would make up about 30 percent of the €16.8 billion in lost revenue, with the extra jobs created saving the government a further €2.75 billion in welfare payments and a further €550 million coming in income tax receipts. Together, that meant just 46 percent of the tax cut would pay for itself.