Tax cuts, 1998–2005
Tax cuts implemented gradually between 1998 and 2005 led to sharp reductions in Germany’s personal income and corporate tax rates.

During the chancellorship of Gerhard Schröder tax policy underwent two basic kinds of reforms. On the one hand, new environmental taxes helped better regulate fossil fuel consumption, while the additional revenue they generated went to lowering social insurance contributions and creating new jobs. On the other hand, tax cuts reduced the burden on employees and companies. The income tax rate fell in several stages, with the lowest tax rate dropping from 25.9% to 15%, and the highest tax rate dropping from 53% to 42%. It was the greatest tax cut in the history of the Federal Republic of Germany. Corporate taxes were lowered to stop companies from relocating abroad and to strengthen Germany’s traditionally strong middle class. The corporate tax rate sank from 40 to 25% and local business taxes were reduced for small to mid-size companies. A finance reform passed in 2004 strengthened the financial power of municipalities, improving their capacity for performing communal tasks.