The solidarity tax was designed to cover the expenses associated with the reunification of Germany. Is unification still a financial burden in today’s context?
What is the solidarity tax?
The solidarity tax is imposed on affluent individuals as an additional charge on income and corporate taxes, as well as capital gains, amounting to 5.5 percent of the applicable tax.
Following a brief trial period in 1991 and 1992, the surcharge was permanently implemented in 1995 to address the heightened financial requirements stemming from reunification. Nevertheless, akin to all forms of tax revenue, the funds are not designated for any particular use and are absorbed into the federal budget.
Is the rationale still sound?
The Federal Constitutional Court has recently determined that the tax levied to support reunification remains within the bounds of the constitution.
The current federal administration highlights the increased financial requirements stemming from reunification, referencing a pertinent report from 2020. The ongoing process of reunification continues to bear financial implications, particularly evident in areas such as pension insurance and the labour market.
Moreover, the Finance Ministry has explicitly sanctioned a tax system that is socially differentiated. The Federal Fiscal Court has deemed the solidarity surcharge to be permissible. Members of parliament from the FDP, notably the former leader of the parliamentary group, Christian Dürr, have initiated legal proceedings regarding this matter in Karlsruhe. It was contended that the Solidarity Pact, which aimed to create parity in living conditions across the former and new federal states, came to an end in 2019. This ruling indicates that there was no valid reason for the additional levy.
During a discussion with the German outlet Tagesschau24, Reint E. Gropp, the President of the Leibniz Institute for Economic Research, remarked, “From an economic standpoint, the justification for the solidarity tax is no longer relevant.” There are no longer any federal expenditures that can be directly linked to the consequences of reunification. Gropp was called upon by the Federal Constitutional Court to serve as an expert witness during a hearing.
Who else is required to contribute to the solidarity tax?
Up until the close of 2020, nearly all individuals and enterprises across both East and West Germany were required to contribute to the solidarity surcharge. During the tenure of Federal Finance Minister Olaf Scholz from the SPD, a significant number of taxpayers found themselves relieved from the burden of the surcharge: since 2021, it has been primarily higher earners, corporations, and investors who have continued to shoulder this financial obligation.
For the vast majority of taxpayers, specifically 90 percent, it was abolished under the “Law on the Repayment of the Solidarity Surcharge 1995,” while an additional 6.5 percent saw at least a partial repeal. The German Economic Institute reports that approximately six million individuals and 600,000 businesses continue to bear the burden of the levy.
This year, the Ministry of Finance has announced that individuals with an income tax liability of at least €19,950 will be required to contribute to the solidarity tax. This indicates that all unmarried individuals earning around €73,500 or above will bear partial responsibility for the tax obligations. The complete solidarity tax is applicable for taxable income of around €114,300 or greater. The thresholds are elevated for those who are married or for taxpayers with dependants.
What importance does the solidarity tax hold for the federal budget?
This year’s draft budget outlines fixed solidarity tax revenues amounting to €12.75 billion, which constitutes approximately 2.6 percent of the total budget in relation to the government’s draft for 2025. This aligns with the substantial budgets allocated to ministries like the Federal Ministry of the Interior, which stands at €13.75 billion, and the Federal Ministry of Family Affairs, with a total of €14.44 billion for the year.
Economist Gropp characterises the solidarity tax as “a sort of special levy for those with higher incomes”. The state is in dire need of every euro for infrastructure investments across both East and West Germany, Gropp remarked to Tagesschau24, and can scarcely justify its abolition: “It would likely have been more prudent to incorporate the solidarity tax into the income tax.”
The total elimination of the solidarity surcharge has already been a topic of discussion among the coalition comprising the SPD, the Greens, and the FDP, who are set to govern from 2021. Christian Lindner, who was serving as finance minister at the time, had made a public appeal for the elimination of the solidarity surcharge a year prior, yet faced opposition from both the SPD and the Greens.
What was the perspective of other courts on this matter?
This marks yet another occasion on which a prominent German court has delivered a ruling regarding the solidarity surcharge. The Federal Fiscal Court in Munich has dismissed a lawsuit concerning the surcharge in 2023, affirming its constitutionality.
The plaintiffs, a married couple hailing from Aschaffenburg, alongside the Taxpayers’ Association, sought a referral to the Federal Constitutional Court.
The ruling from the Federal Fiscal Court indicates that the federal government has effectively shown that reunification will persist in generating heightened financial demands, despite the expiration of the solidarity pacts intended to finance the unified burdens.
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