Germany mulls VAT increase to fund income tax cuts

The German government is considering whether to increase value-added tax (VAT or Mehrwertsteuer). The SPD says increased rates must fund tax relief in other ways.

Germany may increase VAT to 21%

Germany’s CDU/CSU-SPD coalition government is currently weighing up a number of potential tax and social security contribution reforms. Among them is a plan to raise the VAT rate from 19 percent to 21 percent, according to a report by Handelsblatt.

VAT is a general tax on all goods and services, charged as a percentage of the sale price at every stage of production and distribution. When the VAT rate is increased, goods and services - everything from a Döner to a haircut - become more expensive for consumers.

According to Handelsblatt, charging shoppers 2 percent more VAT at the till would bring an additional 31 billion euros into government coffers. 

SPD pushing for income tax cuts

While the CDU/CSU is pushing for the VAT increase, Vice Chancellor and Finance Minister Lars Klingbeil from the SPD arm of the coalition says the increase should only be introduced if consumers are otherwise financially relieved.

Klingbeil has suggested a “tangible” reduction in income tax and social security contribution rates. According to Klingbeil’s suggestion, people with an income of around 3.000 euros per month before tax would save 300 to 400 euros per year.

But the CDU believes Germany’s high-income households should also see tax relief. CDU General Secretary Carsten Linnemann has suggested that the threshold after which the top tax bracket applies should be increased from 68.000 euros to 80.000 euros.

The SPD has also proposed cutting the reduced VAT rate (ermäßigte Mehrwertsteuersatz), which applies to certain products such as groceries, books, and some sporting or cultural events, from 7 percent to 4 percent. 

Handelsblatt reported that the government is also considering cutting the reduced VAT rate for groceries to 0 percent. But no decision has been made.