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Who benefits most under Germany’s tax relief plans?

German Finance Minister Christian Lindner says he wants to give taxpayers relief worth €10 billion in the face of rising inflation. But there is already pushback, with some saying high earners will benefit the most.

A person places money in a piggy bank in Germany.
A person places money in a piggy bank in Germany. Photo: picture alliance/dpa/dpa-Zentralbild | Patrick Pleul

What’s happening?

As Germany battles rising inflation, Finance Minister Christian Lindner has revealed a plan to give residents tax relief worth more than €10 billion in total. 

“Employees and low-income earners, pensioners and self-employed, students with taxable part-time jobs and, above all, families will benefit,” the FDP politician wrote in a guest article for German daily FAZ on Wednesday.

As well as an adjustment of the benchmarks in the income tax scale, child benefit and child allowance are also to be increased.

READ ALSO: How the German Finance Minister wants to ease inflation with tax relief measures

According to sources in the Finance Ministry, the so-called ‘Inflation Compensation Act’ provides for child benefits to be increased in two stages and also to be standardised. Under the plans, the first, second and third child will each receive €227 per month next year. From the fourth child onwards, €250 will be added. In 2024, the rates for the first to third child are to be raised again – to €233.

At the same time, Lindner’s draft provides for an increase in the basic tax-free amount, i.e. the income up to which no tax has to be paid. The Finance Minister wants to raise this limit from the current €10,347 to €10,632 in the coming year and €10,932 in 2024.

Finance Minister Christian Lindner speaks at a press conference in Berlin.

Finance Minister Christian Lindner speaks at a press conference in Berlin. Photo: picture alliance/dpa | Kay Nietfeld

READ ALSO: Germany pledges inflation relief tax package worth €10 billion

Other key values of the tax scale will also be shifted to compensate for the effect of so-called ‘cold progression’. This is the term used to describe a kind of creeping tax rise when salary increases are eaten up by inflation but still lead to higher taxation. People are then hit with higher taxes, although purchasing power does not increase at all in real terms.

“A tax system that also imposes higher taxes on people who are already suffering from high prices is not fair,” Lindner wrote in FAZ. Eliminating this is “not a patronising act, but is called for in several respects”. Lindner says his plans would benefit 48 million taxpayers.

Who would benefit most?

In order to mitigate the effect, the top tax rate, which currently starts at an income of €58,597, will only apply at a level of €61,972 in 2023, and €63,521 one year later.

However, the tax threshold for very high incomes will remain in place. The income limit of €277,826, on which the so-called wealth tax rate of 45 percent is charged, will not be changed.

But there is already widespread criticism of the plans because in absolute terms, top earners would benefit more from Lindner’s tax cuts than low earners.

The FDP’s coalition partners – the Greens – said they considered the plans to be socially unbalanced.

“High and highest income groups would receive more than three times as much as people with low incomes, who actually need the relief most urgently,” said Greens parliamentary group vice-president Andreas Audretsch. Furthermore, people with very low incomes would not get any relief at all because they pay no income tax below the basic tax-free amount.

Katharina Beck, the Greens’ spokesperson for financial policy, expressed similar views. “The other way round would be right: strong shoulders should bear more than low-income shoulders and not be disproportionately relieved,” she told the Redaktionsnetzwerk Deutschland (RND) on Wednesday.

Lindner’s plans have a greater impact on low incomes in percentage terms, but in absolute terms people with high incomes benefit more.

For example, a taxpayer with a taxable income of €20,000 is to be relieved by around €115 per year under the current plans. With an income of €60,000, the relief amounts to €471, according to figures from the Ministry of Finance. 

What’s the reaction elsewhere?

Vice-chairman of the SPD parliamentary group, Achim Post, said the relief doesn’t go far enough.

“The proposed increases in the basic tax-free allowance and child benefit are a step in the right direction, but they are not enough,” he said. 

He suggested direct payments as an alternative, which could provide targeted relief to people with small and medium incomes. 

A woman holds cash in her hand.

A woman holds cash in her hand. Photo: picture alliance/dpa | Daniel Karmann

‘Falls short’

Meanwhile, the German Trade Union Confederation (DGB) rejected the proposals. Lindner’s tax plan “falls far too short”, said DGB Executive Board member Stefan Körzell.

For the relief for people with small and medium incomes, the basic tax-free amount would have to rise to €12,800, said Körzell, adding: “Instead, top earners and the rich benefit, although they have far fewer problems coping with the current price increases.”

Körzell said that “top earners and the wealthy must contribute more to tax revenue”.

He said the FDP politician’s plans would cause “serious revenue shortfalls” for the treasury.

FDP Secretary General Bijan Djir-Sarai rejected the criticism as baseless. The adjustment is aimed at smaller and medium incomes and reduces “the tax burden of the hard-working middle”, he said.

For top earners, the relief amount is capped, he said. “The relief is fair and necessary so that people benefit from a wage or salary increase despite the high inflation and do not have to pay on top through a higher tax burden,” Djir-Sarai said.

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MONEY

Are the EC Card’s days numbered in Germany?

Maestro-function EC cards will no longer be issued as of July 2023. That may leave many people with German cards without the option to use the ubiquitous “EC Karte” abroad. Here's what you need to know.

Are the EC Card’s days numbered in Germany?

In a country that often lags behind much of the rest of the world digitally, cash is still king in many places. From restaurants to bars, cafes, and some smaller shops – options to pay by card are often limited. If a place does take card, it’s often the debit EC card, rather than a credit card or plastic from abroad.

That could soon see a shakeup.

Around 100 million EC cards are currently in use in Germany – more than the number of residents. These cards use two payment services: the Maestro service, which Mastercard provides, and the Girocard service which is independent. Maestro allows the holder to pay with an EC card when abroad, whether at a beach bar in Spain or a museum in Italy.

At home in Germany, Girocard processes EC card transactions.

But the EC card’s popularity here doesn’t translate elsewhere. German cards account for about half of all worldwide Maestro transactions, with the remaining half split absolutely everywhere else in tiny amounts. As such, it’s become difficult and expensive for Mastercard to maintain the old Maestro system that so many people in Germany love to use.

As of 2023, Mastercard will no longer issue Maestro cards, although people can still use ones issued before then until they expire. Without an alternative, that would leave some German debit card holders unable to pay using their new cards abroad.

Rumour has it that a similar Visa service – Vpay – is also on the way out soon.

That could see many cardholders ditch their old EC cards for Mastercard and Visa’s debit services — but around 250,000 businesses in Germany still only take payments made through the Girocard service — which isn’t a part of Visa or Mastercard. A big reason is that retailers pay lower fees to use Girocard.

What are the alternatives to EC Cards?

Where might that leave cardholders in Germany? It might put more pressure on retailers to accept services other than Girocard, which could incur fees that retailers will simply pass on to buyers.

It might leave some people carrying multiple cards, with a debit card they would only ever be able to use at home and not abroad. Or, it might mean carrying more cash just in case people come into an establishment that only takes cash and Girocard.

Some German banks have already moved ahead to offer customers integrated cards.

DKB, an popular online bank in Germany, sees Girocard as an outdated model that can’t be developed much further—and one that’s hard to use for online shopping. Since January, it has only issued customers with a Visa Debit card, but has left them the option to also have a Girocard. This will no longer be free though, costing customers an extra €1 a month.

A customer pays with EC card in a local shop

A customer pays with EC card in a local shop. Many businesses still only take EC card or cash payment in Germany. Photo: picture alliance/dpa | Rolf Vennenbernd

READ ALSO: Why Germans are finally choosing cards over cash

Other banks, like ING, use a ‘co-badge’ system that pays for both the licenses to Girocard and either Visa or Mastercard. However, that leaves cardholders paying a higher fee.

Professor Jürgen Moormann of the Frankfurt School of Finance and Management told Frankfurter Allgemeine Zeitung (FAZ) that MasterCard and Visa are probably discontinuing the Maestro and Visa services for EC cards abroad to put more pressure on Girocard within Germany.

This makes it more likely that retailers will start offering more card-based payment options, such as credit and debit card, to keep things simple for customers.

“They clearly want to increase their market share in Germany,” Moormann says of Visa and Mastercard.

While it’s still too early to tell whether the EC card will be squeezed out, regular cardholders may be left carrying more than one card — or paying higher fees for integrated cards — for a while yet.

In Germany at least, the EC card will be around for some time to come — but its days may well be numbered.

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