Nearly three decades after the fall of the Berlin Wall, Germany is moving to eliminate the so-called solidarity tax that helped finance reunification.
The 5.5% tax that was levied on all but low-income earners is to be abolished from 2021 for 90% of those currently paying it, Finance Minister Olaf Scholz said in Berlin.
In 2018 the levy generated total revenues of 18.9 billion euros ($21.2 billion). But actual shortfalls could amount to only half that, as the wealthiest contributors — roughly 10% — will continue to pay what locally is referred to as the Soli.
The tax phase-out, as presented, is part of the coalition agreement drawn up after the 2017 parliamentary elections and was already budgeted for and wouldn’t generate deficit spending.
“It’s a small stimulus for the economy,” said Holger Schmieding, chief economist at Berenberg Bank. “As it’s part of the coalition agreement, it’s already part of growth forecasts.”
The announcement comes amid growing pressure for increased stimulus as Europe’s largest economy slows and risks entering a recession. The parties in Chancellor Angela Merkel’s coalition lost considerable support in opinion polls in recent months. In two regional elections on September 1 in Saxony and Brandenburg, Merkel’s Christian Democrats and Scholz’s Social Democrats, could lose for the first time since reunification in 1990 – to the right-wing Alternative for
Germany, or AfD, polls suggest.
“It’s also a contribution to economic expansion in Germany, we know the economy is a bit weak,” Scholz said at the finance ministry.
Merkel’s CDU wanted the levy scrapped for all tax payers but backs Scholz’s initial plan as a first step. Some opposition parties have said they will challenge it in court as anti-constitutional.
While Soli had been intended to bridge the economic gap between East and West, regional wage and infrastructure differences continue to rile voters and challenge politicians. Even without the tax, the federal government continues to pay for a host of economic development programs in the former communist states.
German investor sentiment slumps
Investor confidence in Germany’s economic outlook worsened for a fourth month after a string of disappointing figures raised recession risks.
Europe’s largest economy probably contracted in the second quarter as slower global growth and uncertainty from a US-China trade war weighed on demand. Tuesday’s report showing expectations plunged to the lowest since 2011, below even the most pessimistic forecast in a Bloomberg survey, is the latest to capture the gloom surrounding the nation’s manufacturing slump.
German stocks extended declines following the ZEW reading, which underscored concerns about the nation’s economy. Alongside trade fears and expectations for more European Central Bank stimulus, that’s helped push yields on German debt to record lows below zero.
“The most recent escalation in the trade dispute between the US and China, the risk of competitive devaluations, and the increased likelihood of a no-deal Brexit place additional pressure on the already weak economic growth,” ZEW President Achim Wambach said in a statement. “This will most likely put a further strain on the development of German exports and industrial production.”
Major firms including Continental, Lufthansa and Daimler have all slashed their outlooks in a warning that momentum might slip further. Deteriorating growth prospects — Germany is forecast to expand a mere 0.6% this year — have fueled calls for more fiscal stimulus.
So far the government has been reluctant though. Chancellor Angela Merkel “has never left any room for doubt” that she stands by the goal of a balanced budget, her chief spokesman, Steffen Seibert, said, when asked whether the administration was considering issuing new debt to fund environmental projects.
At the European Central Bank, policy makers have indicated they’re prepared to provide more monetary support to prop up the euro-area economy. Interest-rate cuts and asset purchases could be announced as soon as September.