A Traffic Light Coalition Compromise Could Save German Taxpayers up to EUR 16.4 Billion

A compromise on tax by Germany’s traffic light coalition could bring citizens up to EUR 16.4 billion in relief if the SPD gets its way on tax rates and the solidarity surcharge is abolished. This is the result of an ifo Institute analysis of the possible coalition alliances’ tax proposals. “All that has emerged so far from the exploratory talks is that taxes will not be raised. However, it is quite possible that they will be lowered in the further course of the talks,” says Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys and coauthor of the study.

If the coalition agrees to the Greens’ tax rates and the solidarity tax is abolished – as demanded by the FDP – the drop in tax revenue would amount to EUR 7.8 billion. Tax revenue would also be affected by different basic allowances. The Green’s proposed basic allowance of EUR 10,344 with no solidarity surcharge would reduce revenue by EUR 10.2 billion. If the basic allowance were EUR 10,744, as proposed by the SPD, and the solidarity surcharge were retained, the loss of tax revenue would be somewhat less, at EUR 8.2 billion.

The ifo analysis also considered the employment effects of possible compromises: “A situation where, under a traffic light coalition, the SPD prevails with its tax rates and the solidarity surcharge is dropped would lead to the highest growth both in employment and in labor-market participation,” Peichl says. The increase in hours worked per year would be equivalent to 122,000 people each working 40 hours per week. In addition, the reform would result in 72,000 people taking up gainful employment.