German gov’t may scrap plan for €1.000 tax-free employee bonus

The German government’s plans for a 1.000-euro, tax-free employee bonus are looking less likely to go ahead following a veto in the Bundesrat. Critics say tax reform would be more effective anyway.

Bundesrat vetos tax-free bonus

The Bundesrat, which represents the German federal states, has voted against the CDU/CSU-SPD coalition’s plan to introduce a tax-free "relief bonus" (Entlastungsprämie) for employees in Germany.

The Entlastungsprämie would enable employers to pay their employees a tax-free bonus of up to 1.000 euros until June 30, 2027, but employers would not be obliged to pay any bonus. The government expects the incoming tobacco tax increase to cover the shortfall incurred from the Entlastungsprämie.

According to government spokesperson Stefan Kornelius, the coalition has yet to decide whether to pursue the policy further or bring it to a mediation committee, but will announce a decision “very soon”. “In light of the rising cost of energy, relieving citizens remains the goal,” Kornelius told the dpa.

Would the Entlastungsprämie be effective?

The government hopes the Entlastungsprämie, alongside a fuel tax cut that has been in effect since May 1, will cushion the financial blow of the oil crisis for consumers.

But experts have questioned the effectiveness of both policies. The fuel tax cut means fuel companies will have to pay less tax, which is expected to cost the public purse around 1,6 billion euros.

The government expects these companies to pass these savings on by reducing prices for customers, but they are not obliged to. Experts are currently divided on how long it might take until drivers feel the benefit of the fuel tax cut, and how great that benefit might be.

Regarding the Entlastungsprämie, three main concerns have been raised. First, if employers are not obliged to pay the bonus, there is no certainty that employees will benefit. Second, with many companies facing economic difficulties, paying the bonus would not be financially viable for many companies. 

Third, in its current form, the policy would largely benefit employees already in higher-paid jobs, not those who are in greatest need of financial relief from rising energy costs.

Söder and Klingbeil for tax reform

Markus Söder, CSU leader and Premier Minister of Bavaria, has suggested the federal government should instead consider a tax reform. 

Currently, people in Germany who earn between 69.879 and 277.825 euros annually are taxed at the top tax rate of 42 percent. People with an annual income of 277.826 euros or more are charged at 45 percent, also known as the “rich tax” (Reichensteuer).

Söder has said the CSU would not agree to increasing the inheritance tax or the top tax rate, but that politicians should debate increasing Germany’s “rich tax”.

Federal Finance Minister Lars Klingbeil (SPD) is already in favour of increasing the top tax rate to 47 percent and the “rich tax” to 49 percent for those earning over 250.000 euros per year.