Germany Moves to Cut Reunification Tax for All But the Wealthy

Raymond Colitt

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Chancellor Angela Merkel’s cabinet on Wednesday agreed to abolish a tax that was used to help finance reunification for all but the very wealthy.

From 2021, the so-called “Solidarity Surcharge” will be eliminated for 90% of those currently paying it and another 6.5% will receive partial relief, the finance ministry said in a statement. As a result, expected revenue will decline by 10 billion euros ($11 billion) in 2021, rising to an annual 12 billion euros by 2024, the ministry added.

"Today is an important day in the process of completing German reunification.” - German Finance Minister Olaf Scholz

The move, which needs parliamentary approval, is a victory for Finance Minister Olaf Scholz, who stood firm against demands from some in Merkel’s Christian Democratic party to abolish the tax completely. It also comes just a few months before November’s 30th anniversary of the fall of the Berlin Wall.

Scholz said it’s fair for high-income groups to continue paying and that the decision would withstand any potential legal challenges. Germany still has to finance some unfinished work linked to reunification, he added.

Scholz is due to formally announce his candidacy to become co-head of his Social Democratic party, Merkel’s junior coalition partner, later on Wednesday. The cabinet accord also coincides with preparations in the government for a fiscal stimulus package in case the economy heads into a deep recession.

The tax phaseout is a small boost for the economy but already priced into growth forecasts, Holger Schmieding, chief economist at Berenberg Bank, said when Scholz detailed the plan last week.

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