Limited reduction of the tax burden, but intensified government spending on infrastructure

On that condition the federal
government can dispose of additional (free) funds in the amount of cumulated
EUR 30 bn to 45 bn by end-2021, according to our estimates. This volume could
be increased by (partial) tax hikes or – less likely – the use of technical reserves
from the debt brake mechanism. Whether and to what extent a Groko will fall
back on tax hikes could to be one of the most disputed issues in the coalition
talks.

The CDU/CSU is clearly opposed to the SPD’s demands for a higher tax
on ‘very large inhertiances’, for a wealth tax (on ‘huge assets’) and for higher top
tax rates in the income tax. Therefore, we do not expect tax hikes with the
exception of possible modifications of the withholding tax on investment income
(limited increase of the present 25% (plus solidarity surcharge) flat rate). In
return the total amount of tax relief will likely remain below the EUR 15 bn to 17
bn requested by the CDU/CSU. Likely measures are a flattening of the income
tax scale in the lower- and the middle-income brackets, increased family
transfers and the start of the phase out of the solidarity surcharge in 2020, but
possibly initially only in favour of low- and middle-income earners.

All in all these
groups are likely to primarily benefit form tax reductions and transfer increases.
This should foster private consumption.