December 26, 2014 / 7:08 PM / in 3 years

Schaeuble says he is ready to tackle tax 'bracket creep' in Germany

BERLIN (Reuters) - German Finance Minister Wolfgang Schaeuble said he would be ready to cut income taxes by adjusting thresholds for inflation if the upper house of parliament agrees to scrap a practice that generates billions of euros in annual revenues.

German Finance Minister Wolfgang Schaeuble speaks during the budget debate in the Bundestag, the lower house of parliament, in Berlin September 9, 2014. REUTERS/Fabrizio Bensch

Thresholds in Germany’s progressive tax system are not automatically adjusted for such factors, which means that an individual’s pay rise can trigger a net pay cut. The taxpayers’ association has estimated the lack of adjustment enables the government to raise between 2 billion euros and 6 billion euros ($2.5 billion to $7.5 billion) of extra revenue a year.

“If the states agree, we’ll eliminate ‘cold progression’,” Schaeuble told Bild newspaper in an interview to appear on Saturday. Schaeuble and his ruling conservative party have until now said there was not enough scope for such tax relief.

The center-left Social Democrats (SPD), who rule with Chancellor Angela Merkel’s conservatives, and some conservative state premiers have been pressing to eliminate the “bracket creep” before the next federal election set for 2017.

Merkel dangled the promise of tax relief at a party congress in Cologne early this month. But this would be conditional on a balanced budget and may be blocked by some state premiers, who are reluctant to forgo the tax revenue.

“SPD chairman Sigmar Gabriel wants that (reform) too and is urging the SPD state leaders to push it through quickly,” Schaeuble told Bild, according to excerpts released on Friday. He said, however, that taxpayers might not feel a lot of relief.

“I have to warn against exaggerated expectations,” Schaeuble said. “With our current low inflation rates, there will not be large amounts (of tax relief) coming out of this.”

Earlier this year Schaeuble had dashed hopes of such reform during the present legislature, saying there were no plans to tackle it in 2016.

The Organisation for Economic Co-operation and Development (OECD) has repeatedly urged Germany to introduce index-linked tax brackets.

Gabriel and some regional leaders in Merkel’s party have said reforming the tax brackets should be possible in the four-year legislative period because public finances are improving.

Some conservative leaders are keen for such reform by 2016 before regional elections in states that the SPD or their erstwhile Green allies rule: Baden-Wuerttemberg, Rhineland-Palatinate, Berlin and Mecklenburg-Vorpommern.

Reporting by Erik Kirschbaum; Editing by Ruth Pitchford

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