Germany Moves to Scratch Reunification Tax Worth $21 Billion

(Bloomberg) --

Nearly three decades after the fall of the Berlin Wall, Germany is moving to eliminate the so-called solidarity tax that helped finance reunification.

The 5.5% tax that was levied on all but low-income earners is to be abolished from 2021 for 90% of those currently paying it, Finance Minister Olaf Scholz said in Berlin on Monday.

In 2018 the levy generated total revenues of 18.9 billion euros ($21.2 billion). But actual shortfalls could amount to only half that, as the wealthiest contributors -- roughly 10% -- will continue to pay what locally is referred to as the Soli.

The tax phase-out, as presented, is part of the coalition agreement drawn up after the 2017 parliamentary elections and was already budgeted for and wouldn’t generate deficit spending.

"It’s a small stimulus for the economy," said Holger Schmieding, chief economist at Berenberg Bank. "As it’s part of the coalition agreement, it’s already part of growth forecasts."

The announcement comes amid growing pressure for increased stimulus as Europe’s largest economy slows and risks entering a recession. The parties in Chancellor Angela Merkel’s coalition lost considerable support in opinion polls in recent months. In two regional elections on Sept. 1 in Saxony and Brandenburg, Merkel’s Christian Democrats and Scholz’s Social Democrats, could lose for the first time since reunification in 1990 – to the right-wing Alternative for Germany, or AfD, polls suggest.

"It’s also a contribution to economic expansion in Germany, we know the economy is a bit weak," Scholz said at the finance ministry.

Merkel’s CDU wanted the levy scrapped for all tax payers but backs Scholz’s initial plan as a first step. Some opposition parties have said they will challenge it in court as anti-constitutional.

“It has been a burden on everyone so the same circle of people must have that burden lifted,” Linda Teuteberg, secretary general of the liberal FDP, said in an interview with ZDF TV on Monday. “Anything else would contradict the constitution.”

While the Soli had been intended to bridge the economic gap between East and West, regional wage and infrastructure differences continue to rile voters and challenge politicians. Even without the tax, the federal government continues to pay for a host of economic development programs in the former communist states.

--With assistance from Zoe Schneeweiss.

To contact the reporter on this story: Birgit Jennen in Berlin at bjennen1@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Raymond Colitt, Iain Rogers

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