From 2021 onwards, the overall burden on taxpayers will be reduced by around €10 billion, and by 2024 this reduction will amount to around €12 billion. In 2018, the solidarity surchage contributed €18.9 billion to the federal budget. For 2019, the federal government expects revenues from the solidarity surcharge of around €19.4 billion and, in 2020, around €20 billion.
Today is an important day on the path towards completing German unification. Most of the costs of reunification have now been paid. Today, therefore, we can start the process of abolishing the solidarity surcharge for the vast majority of taxpayers starting in 2021. The minimal remaining costs after the expiration of the current Solidarity Pact will, in the future, be shouldered by those who have more than others. This is fair and will also withstand constitutional review Olaf Scholz, Finance Minister
The near-complete abolition of the solidarity surcharge is part of the overall strategy for socially equitable and growth-friendly tax policy. This policy is of particular benefit to families and low and middle income earners, who will profit from significantly improved family benefits (e.g. increased child benefit), reductions in social security contributions (e.g. reintroduction of the rule requiring employers and employees to pay equal contributions to statutory health insurance), higher basic allowances, and compensation for bracket creep. The tax measures taken by this government, by themselves, total more than €25 billion in full annual effect. This makes them the largest tax cuts in more than ten years.
As promised in the coalition agreement, these cuts are focused on supporting low and middle income earners. This is also in line with the principle that those with more resources should bear greater burdens than those with fewer.
Moreover, the near-complete abolition of the solidarity surcharge will have a positive effect on the domestic economy. People on lower and middle incomes will have more left in their bank accounts, and their higher net incomes will strengthen domestic demand. Further, the abolition of the surcharge is not limited to employees. Many self-employed individuals and small business owners will also be exempted, which will create incentives for investment and new jobs.
The main points of the draft law:
- Increase of the exemption limit below which no solidarity surcharge is payable to €16,956 (individual filers) or €33,912 (joint filers) of the tax payment. As a result, a family with two children and a gross annual income1 of up to €151,990 will pay no solidarity surcharge, and nor will single persons with a gross annual wage of up to €73,874.
- Adjustment of the reduced-liability range so that tax relief extends well into the middle-income range. For those whose income tax liability exceeds the exemption limit, the solidarity surcharge will not be levied immediately at its full rate of 5.5%. This will lessen the burden on the majority of those still subject to the solidarity surcharge, albeit with decreasing effect as income rises.
- The sample calculations are based, as far as possible, on the 2021 tax year. In accordance with the Retirement Income Act (Alterseinkünftegesetz), pension expenses have been taken into account at a rate of 92%; the income thresholds for social security contributions are assumed to continue in effect in 2021; and it is assumed that social security contribution rates will remain unchanged until 2021. Income tax was calculated according to the income tax rate applicable as of 2020; child benefit and allowances for children were taken into account at the amounts applicable as of 2020.