Daily Süddeutsche Zeitung reported that Schäuble wanted to give local governments in each city or municipality the power to set income tax rates for the people in their areas.
The radical plan could mean that a worker in Berlin paid different income tax rates to a worker in Munich. Schäuble is discussing the plan with the municipal association, which represents local governments, the paper reported. The association has misgivings about the plan.
Under Schäuble's plan, municipalities could charge additional rates on top of the standard income tax. Income tax would in future be divided into two parts: the federal and state share, and a local municipality share.
The federal and state share would be reduced slightly and the municipality would set its own rate. It is not clear whether this might result in a higher overall tax burden for a worker.
The future of Germany's tax system has become the focus of a fresh struggle within the ruling coalition after the government announced it had €61 billion more than it thought.
The revelation on Thursday by Schäuble of a higher-than-expected tax windfall over the next two years sparked renewed debate within the government over tax.
The junior coalition partners, the pro-business Free Democratic Party (FDP), are clamouring for tax relief, but Schäuble, of the conservative Christian Democrats (CDU), is sticking to his long-held position that any extra money should be used to slash the deficit and the government's debt. Chancellor Angela Merkel said the same thing earlier this week.
With the government set to rack up a “terribly high figure” of €50 billion debt this year, tax cuts simply were not on the agenda, Schäuble said Thursday.
“Never say never, but at the moment we have no room to play with,” he said.
Schäuble managed to distract considerable attention from the good news about the windfall on Thursday afternoon by blowing up at his own press spokesman in front of about 50 journalists. Schäuble was apparently angry that written information about the new tax numbers had not been distributed to journalists ahead of a press conference. Schäuble reprimanded his chief media adviser and then left the press conference for 20 minutes.
The FDP, meanwhile, are continuing their campaign for tax cuts. The party's finance expert Hermann Otto Solms said: “Tax reform would be a contribution to the strengthening of domestic demand.''
The head of the Bundestag's finance committee, Volker Wissing, also of the FDP, said: “Our goal is to relieve the people as quickly as possible of €16 billion a year in tax.”
Meanwhile Bavarian Finance Minister Georg Fahrenschon, a member of the conservative CDU's sister party, the Christian Social Union (CSU), called for a simplification of the tax system and an end to cold progression, whereby inflation pushes income earners into higher tax brackets, hiking up the total tax they pay unless the bracket thresholds are adjusted.
“The German tax system is to a large extent anti-achievement, demotivating and opaque,” he said.
Tax relief of €6 billion to €7 billion a year was affordable, thanks to climbing tax receipts, he said. Stopping cold progression would cost €2 billion to €2.5 billion per year.