The traffic light coalition is planning a law that could upend the taxation of 14 million people. It’s about classifying partners who earn different amounts into a new tax bracket.
Married people and people in registered partnerships currently have the option of reducing their monthly tax deductions. To do this, the person with the higher income chooses a favorable tax rate – tax class 3 – and the other chooses an expensive tax rate – class 5.
The result is that one net is very high, the other net is very low, and the bottom line is that both get paid out more together. The following year, the real tax burden is calculated officially, and the couple usually has to pay additional payments – the greater the difference in income, the more. Basically, the state gives married couples and partnerships a new, interest-free loan from year to year. This should end.
Tax class 4 for everyone
The Federal Ministry of Finance is working on a draft law that the SPD, FDP and Greens agreed to in the coalition agreement. After that, tax classes 3 and 5 will be deleted. In the future, couples will have to pay according to tax class 4. This is adapted to the individual family. The tax office calculates the couple’s income distribution, determines allowances and distributes this between the two taxpayers (“factor method”).
The “richer” earner no longer benefits from tax benefits. Instead, both have the same entitlements and pay income tax based on their income. Overall, this regularly leads to higher monthly deductions. However, there are hardly any additional payments due.
Disadvantages for Low-income earners?
Since women often work part-time and in low-paying industries, they usually earn less than their husbands in marriages. By choosing tax class 5, these women are left with a disproportionately low monthly income. This prevents many women from continuing to work. The SPD in the Bundestag therefore believes that the upcoming tax reform would “primarily promote female employment”.
But there are concerns. What if it’s not just the high-earning investment banker with a nurse husband who no longer gets an interest-free government loan? Experts believe it is conceivable that many families with large children and low or middle incomes are affected.
Calculations by the Taxpayers’ Association show that the tax burden during the year could more than double in individual cases. For example, if one part of the family were taxed with 3,000 euros (and tax class 3) and one with 1,000 euros of income (and tax class 5), both would in future be burdened with 324 euros per month instead of the current 160 euros in income tax.
With the reform, couples with little money would face a tough year: in the first tax year they would have to pay the additional payment from previously saved taxes under the old law and get by with lower net income under the new law.
Risks, rules and exceptions
Many couples have settled with their unequal net income, a citizen wrote to the Bundestag Finance Committee. Often the main earner, who is spoiled by taxes, would pay the family’s entire living expenses, and the additional earner could freely dispose of his money. If the main earner has a lower monthly net income in the future, this could change the distribution of costs and place a particular burden on the low-earning husband.
Exceptions and grandfathering rules are discussed. The SPD promises that families with only one earner will continue to be able to distribute one income between both partners for tax purposes. The FDP’s financial policy spokesman, Markus Herbrand, even demands that couples be able to transfer their previous tax planning to the new tax rates.
Bypassing is no longer possible
Many benefits such as unemployment benefits or parental benefits depend on net earnings. It doesn’t matter which tax class it comes from. Married couples who want to have children and where the moderately earning mother wants to stay at home after the birth can quickly swap tax classes: she in class 3, he in class 5. The bottom line is that their joint monthly net income initially drops. After the birth, however, she receives significantly higher parental allowance. The tax return recovers the overpaid wage tax and the tax classes are swapped again at the first opportunity.
Tax reform would end such avoidance options. The Union’s financial policy spokeswoman, Antje Tillmann, believes that this should only apply to new marriages: “I consider this to be inadmissible retroactively.” The SPD does not want to end the circumvention options for state payments immediately, but rather with a “transitional period”.
Even if the draft law is passed quickly, there will be a transition period until it is implemented. A spokesman for the Ministry of Finance says that the tax offices must first be equipped with the necessary computer programs in order to be able to carry out the calculations for the future tax rate 4. The SPD is talking about the next electoral period, i.e. in two years at the earliest.
What will become of this? Spousal splitting?
The three government parties agree to reform the tax rates. However, there is disagreement about a deeper socio-political purpose. The Green Federal Family Minister Lisa Paus told the “Berliner Morgenpost” that it was about the first step towards the end of spousal splitting, whereupon the FDP-led Finance Ministry emphasized that that was not the issue at the moment.
Spousal splitting is the rule that a marriage or partnership is viewed as an economic unit for tax purposes. Regardless of whether you are in tax class 3, 4 or 5, the income and tax burden will ultimately be distributed between both. “An end to splitting would mean massive tax increases for married couples,” says Reiner Holznagel, President of the Taxpayers’ Association, and he demands: “Hands off spouse splitting!”