Income tax could vary by city under government plan

Germans could pay different income tax rates according to where they live under a plan being drafted by Finance Minister Wolfgang Schäuble, media reported Friday.

Income tax could vary by city under government plan
Photo: DPA

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.

The Local/DAPD/dw

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Ehegattensplitting: How did Germany’s marriage tax law become so controversial?

Ehegattensplitting, literally translated as “spouse splitting,” is a German policy which allows married couples to save taxes by dividing their income. Some argue that the policy, in place since the 1950s, should be abolished.

Ehegattensplitting: How did Germany's marriage tax law become so controversial?
Photo: picture alliance/dpa | Rolf Vennenbernd

How does Ehegattensplitting work?

Ehegattensplitting refers to how married couples’ income taxes are calculated under the German law. At the end of a financial year, couples can opt to file taxes jointly through Ehegattensplitting. If they choose to do so, the income of the two spouses will be added together and then halved. 

The tax authority calculates taxes for the couple’s average income and then doubles that amount to arrive at a final tax figure. The total amount of income taxes owed to the government based on Ehegattensplitting is often less than the amount owed if each partner had filed separately. 

READ ALSO: Everything you need to know about paying taxes in Germany

The optional system benefits couples in which one partner makes substantially more than the other, and it also applies to marriages in which only one spouse earns an income. Single-earner couples will typically reap the most benefits. On the other hand, if both partners earn roughly the same amount, they gain no advantage from Ehegattensplitting

With very few exceptions, “the elegant thing about full income splitting, as it is in place in Germany, is that there’s no constellation where a married couple pays more in taxes than two single individuals,” explained economist Katharina Wrohlich, of the University of Potsdam and DIW Berlin, in an interview with The Local earlier this year. 

Why is Ehegattensplitting controversial then?

On the one hand, advocates of the policy often cite the special status of marriage under the law and argue that marriage is a cooperative economic arrangement which should be recognised as such. 

On the other hand, critics have suggested that the law can often discourage women from working – either at all or in part-time positions – and that it is unfairly preferential to higher-income households.

Wrohlich explained the gender-equality-based criticism this way: “The drawbacks are that both partners face the same marginal tax rate. So, the secondary earner, which is mostly the woman in Germany, faces a much higher marginal tax rate than she would if she were taxed individually.”

As a result, “there are very strong negative incentives to either take up work or to increase working hours, in particular for married women,” she said.

Timm Bönke, an economist at Free University Berlin, noted that even though some spouses will be discouraged from working, there is “no loser” because the couple also gains tax advantages.

Instead, according the Bönke, “the disadvantage is that Germany loses a lot of money by having [Ehegattensplitting] because it is discouraging work and, on the other hand, you have a lot less revenue from taxation,” which could go towards funding education or child care, for example. 

Another criticism has to do with social policy.  As Wrohlich explained, “This kind of tax subsidy through income splitting increases with income. So, very high-income couples profit much more from this kind of policy than families with low incomes. And this is perceived to be very unfair, at least among some people.”

Additionally, some critics argue that Ehegattensplitting ought to take into account whether or not a family has children. 

Two wedding rings on a text reading ‘joint assessment’. Photo: picture alliance/dpa/dpa-tmn | Andrea Warnecke

What is the history behind Ehegattensplitting?

Married couples in Germany have not always enjoyed these tax benefits. In fact, in the years prior to the late 1950s, many German couples were at a financial disadvantage when it came to taxation. This disadvantage resulted from the progressive tax system first introduced in the 1920s, whereby higher incomes are taxed at higher rates.

Under this system, a married couple would jointly pay taxes at the higher rate associated with the sum of their income. As a result, the typical married couple would pay more in taxes than they would have as unmarried individuals. 

READ ALSO: ‘Ja, ich will’: What it’s like to get married in Germany

By the early 1950s, the added tax burdens on some married couples — often called the “marriage penalty tax” — had garnered public concern.  In 1957, the German Federal Constitutional Court ruled that the existing tax law discriminated against married people and was thus unconstitutional.

Although several alternative policies were considered, the German legislature ultimately passed the Tax Amendment Act of 1958 which introduced Ehegattensplitting. It has been in effect ever since.

Since the 1950s, the German Constitutional Court has upheld the constitutionality of Ehegattensplitting. In 1982, the court defended the policy under the premise that it properly recognizes marriage as a cooperative arrangement. In 2013, the German government allowed civil partners, including same-sex partners, to split their income for tax purposes, as well.

What are possible alternatives to Ehegattensplitting?

Since its inception, several reforms to Ehegattensplitting have been put forth. 

One possible alternative to Ehegattensplitting involves a transferable tax-free personal allowance, which is the amount of untaxed income that each person is entitled to receive.  In Germany, you are entitled to a basic exemption of roughly 10,000, which decreases with higher incomes.

According to the proposed reform, “the idea is that in a married couple, both are, in principle, taxed individually, but as long as one spouse does not use up his or her own personal allowance, he or she can transfer it to their partner,” Wrohlich said. 

Another possible reform would involve moving towards the system of family tax splitting used in France. Wrohlich explained that the French and German systems are actually very similar: “In France, married people without children can do exactly the same income splitting as in Germany, only that, in addition, if they have children, they get additional splitting factors.”

In this system, income is split further for each additional child, with added benefits following the birth of the third child. 

Should we expect Ehegattensplitting to stick around?

The possibility of reforming Ehegattensplitting may gain renewed attention in light of the federal election. Within the past year, both the Greens and the centre-left Social Democrats (SPD) have proposed reforms to the policy of Ehegattensplitting.

The SPD, Greens and the Free Democrats (FDP) are currently in coalition talks to form a new government. 

Some experts are pessimistic about any radical reform to the law. Bönke told The Local earlier this year: “I don’t think that in the near future you will see that income splitting is abolished. ”

Instead, he believes it is more likely that “income splitting is opened or will be made available for different kinds of families that are not married”. But, he noted, making more people eligible for income splitting will likely disincentivise even more people from taking up work.