Figure 2 - Development of tax rates and the basic tax-free amount 1998-200551.0%
48.5%
45.0%
42.0%45.0%23.9% 22.9%
19.9%
16.0% 15.0%40.0%25.0%26.5%
25.0%53.0%25.9%15.0%45.0%7,206 €7,664 €
6,902 € 7,235 €6,322 €6,681 €1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Highest-tax rateCorporate-tax rate
(on retained
earnings)Starting-tax rateBasic personal
allowanceData updated for 2006-08.In addition to lowering income-tax rates, which relieves not only private households but also
unincorporated companies, which are very common in German corporate landscape, fundamental
reforms have been carried out in the field of corporate taxation. The competitiveness and European
compatibility of the corporate taxation system has been markedly improved by the cutting of the
corporate-tax rate to 25% on distributed profits and profits retained for use in the business, and as well as
by the introduction of the half-earnings taxation procedure. Unincorporated companies can take now
credit trade tax as a lump sum against their income-tax debt. As a result, most unincorporated companies
pay little or no trade tax. Overall, the annual savings to the taxpayers made possible by the tax laws
adopted since 1998 total almost €60 billion (taking full effect in 2009).
In addition to the completion of the 2000 Tax Reform, the selective cutting of tax privileges and tax
expenditures is one of the main priorities of tax-reform policy. Appreciable progress has been made in
reducing owner-occupied housing allowance, professional expenses employees' blanket deductions,
travelling allowance for commuters and in restriction of tax privileges on capital life-sum insurance
policies.
As a result of these measures, the overall rise in tax privileges can be stopped in 2006. Even so, further
action is needed, and the issue of cutting back tax privileges remains on the agenda despite the progress
that has already been made. However, the necessary reduction can only be achieved if agreement can be
reached between the different federal levels (Federation and Länder). Reducing tax privileges usually
requires the agreement of the Bundesrat (Upper House of Parliament), so that different political interests
can lead to coordination problems that make it more difficult to find a consensus.
In view of the extensive tax relief that has already been granted and the present situation of public
budgets, no further net tax relief is planned for the future. However, the ongoing and increasing
internationalisation of the economy and the growing influence of European jurisdiction amount to
continuous challenges for taxation policy, particularly in the field of corporate taxation. The federal
government sees a need to harmonize corporate taxation in Europe in the medium term. The current need
is to weaken incentives to engage in tax planning and shift profits abroad by reducing the nominal tax
burden on joint-stock companies. At the same time it is important to guarantee that the measures are fully