German court upholds reunification-era tax on high earners, companies

By Ursula Knapp

KARLSRUHE, Germany (Reuters) -Germany's Constitutional Court on Wednesday upheld an additional tax shouldered by certain taxpayers and many companies, first introduced in the 1990s to smooth out the differences between East and West following reunification.

The "solidarity surcharge" remains in place today - albeit in a narrower form - angering economically liberal lawmakers who sought to have it overturned by the top court.

The judges said their complaint was unfounded as additional financing was still needed as a result of reunification.

Last year, the surcharge, which amounts to 5.5% of income and corporation tax, contributed around 12.6 billion euros ($13.6 billion) to German government coffers.

The income tax surcharge only applies to higher earners taxed upwards of 19,950 euros annually, corresponding with 10% of taxpayers.

The conservatives, who won Germany's February election, want to abolish the solidarity tax, while the Social Democrats - whom the conservatives seek to form a coalition government with - want to keep it in its current form.

The reunification of Germany in 1990 brought with it a major economic project to bring the communist regions of the east in line with their western neighbours, a goal that by some standards has still not been reached: today, incomes are generally lower in the east and unemployment is higher.

Six plaintiffs that challenged the solidarity tax in court, all members of the pro-business Free Democrats (FDP), said it violated the constitution because the 'solidarity pact' that it was part of, designed to split the costs of reunification, expired in 2019.

They also took issue with the fact that since 2021, some 90% of taxpayers have been exempt from the tax, which they consider a violation of the principle of equal treatment.

Proponents of higher taxes on top earners push back against this argument.

"The fact that the solidarity surcharge now only applies to top earners does not make it any less legitimate - on the contrary: it is now more urgently needed and fairer than ever," said economist and author Julia Jirmann who specialises in the German tax system.

($1 = 0.9243 euros)

(Reporting by Ursula Knapp, writing by Thomas Seythal and Rachel More; Editing by Madeline Chambers and Bernadette Baum)