Unequal treatment of income: Karlsruhe overturns wealth tax for 2007

Unequal treatment of income
Karlsruhe overturns wealth tax for 2007

Income from profits compared to wages above a certain level were taxed differently in 2007. Wrongly, as the Federal Constitutional Court complains. Legislators now have to make improvements by the end of the year.

The so-called tax on the rich was unconstitutional when it was introduced in 2007. The preference of profit income over wage income was not justified, as the Federal Constitutional Court in Karlsruhe decided. According to this, unequal treatment of the types of income is only permitted in exceptional cases with special justification. The court ordered the legislature to make improvements by the end of the year.

The tax on the rich was agreed by the grand coalition. Specifically, the top tax rate was increased from 42 to 45 percent from the 2007 tax year. However, profit income was excluded from this through a so-called relief amount. The higher tax rate therefore only applied to income from dependent employment, leasing and capital income, insofar as it was over EUR 250,000 – for married couples over EUR 500,000.

In 2008 corporate taxes were reformed and the tax relief for profit was abolished. The wealthy tax now generally applies to income over 277,825 euros – for married couples over 555,650 euros per year. The income shares below that are taxed at a lower rate. The number of those affected is also low, in 2018 there were 163,000 taxpayers.

Control purposes are allowed

In 2007, the claimant couple had taxable capital and wage income of a good 1.6 million euros. It called for equal treatment with profit income. The Düsseldorf Finance Court also held the unequal treatment of the types of income unconstitutional and submitted the case to the Federal Constitutional Court at the end of 2012. This has now confirmed the constitutional concerns. In principle, taxes would have to be levied according to performance. Profit income should not be treated differently than income from dependent employment, leasing or capital income.

According to the Karlsruhe decision, a certain unequal treatment is permitted for “promotion or control purposes”. However, these goals must be clearly defined in the legislative decision. Here, the Union and the SPD would have outlined the goal of relieving the burden on companies and thus stimulating the economy in the coalition agreement. However, this was also not very specific and was not adequately reflected in the reasons for the law. There was no information at all about the amount of the intended discharge.

The Ministry of Finance stated that the ruling of the Constitutional Court “concerns a special provision of the Income Tax Act (EStG) that was only applicable for the year (assessment period) 2007”. From the regulation made with the Tax Amendment Act 2007 only for the year 2007 profit income was exempted through a tariff reduction. “Other periods are not affected,” underlined the Treasury.

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