EUROPEAN FISCAL: German Income Tax Thresholds Expected to be Raised

Income tax threshold increases that total a E23bln cut over three years (due to increases both to the basic rate threshold 'Grundfreibetrag' as well as to higher bracket thresholds), were announced by Finance minister Lindner today confirming earlier reports. These increases mainly adjust the thresholds to compensate for inflation and do not seem to bring significant consumer relief.

• Also, Lindner seemed to deny plans on corporate tax breaks earlier reported on (Tax Cuts Likely Counter-Financed Elsewhere If Implemented' - MNI, March 1), so the announcement overall was rather discouraging to any hopes of significant fiscal easing in Germany.
• According to newswire Handelsblatt, the plans are to shift higher the tax thresholds in 3 steps until 2026. The basic threshold is planned to be increased as follows (all from a current E11’604): Retroactively from Jan 1st by E180, a further E300 in Jan 2025 (2.5%) and E252 in Jan 2026 (2.1%).
• As tax brackets are not directly inflation-linked in Germany, the basic tax threshold was also manually raised in the last years - by E399 in 2022 (4.0%), by E561 in 2023 (5.4%), and by E696 in 2024 (6.4% before the potential retroactive additional E180 which increases to 8.0%) - so the announced increases are rather limited compared to recent years, at least in nominal terms.
• Shifts in the maximum threshold (E66'761, above which the highest standard marginal tax rate of 42% has to be paid) are planned to be E1’668 in 2025 (2.5%) and a further E1’369 in 2026 (2.0%).
• The chance of the bill being passed appears to be rather high as per the historically usual adjustment to inflation, even though full internal agreement seemingly was not reached yet.