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Tax reform a key part of new German stimulus plan

A 50 billion euro stimulus package agreed late on Monday by German Chancellor Angela Merkel's coalition includes changes to tax brackets to ease the burden on households, the ruling parties said on Tuesday.

business Updated: Jan 13, 2009 13:45 IST

A 50 billion euro stimulus package agreed late on Monday by German Chancellor Angela Merkel's coalition includes changes to tax brackets to ease the burden on households, the ruling parties said on Tuesday.

Eight months before an election, Merkel's conservatives and the Social Democrats (SPD), who share power in an uneasy coalition, agreed new measures to help Europe's largest economy through what could be its worst recession since World War Two.

Details of the two-year 50 billion euro plan ($67.02 billion) were still trickling out on Tuesday morning but central to the package is 18 billion euros in new investments in infrastructure and education.

There will also be incentives worth 2,500 euros for new car purchases. The entry level tax rate will go down slightly and tax-free thresholds will be raised slightly, the parties said.

Volker Kauder, parliamentary leader of Merkel's conservatives, told ZDF television on Tuesday that on top of these measures, the package would also address so-called "cold progression", the process by which taxpayers are shifted into higher tax brackets even when real incomes have not grown.

Reform of this process, which occurs in Germany because tax groups are not adjusted for inflation, was one of the most difficult issues for the parties to agree on.

"There will be not just a change to the threshold and the entry tax rate but there will also be an adjustment to the tax groupings so that we can get into (tackling) cold progression," Kauder said. "It is something for the whole tax system."

Peter Struck, SPD parliamentary floor leader, told German television the package would ease the tax burden.

"With this package we can achieve our goal of emerging from this crisis as best we can."

This is the government's second stimulus package. It agreed a first one, which it valued at 31 billion euros, in November but critics attacked it for being too modest.

Opposition leader Guido Westerwelle, head of the liberal Free Democrats (FDP), also attacked the new package.