One aim of the first phase of the tax reform coming into effect in 2004 is to strengthen the economic recovery. One of its elements is a tax relief granted for retained profits of non-incorporated firms to further the formation of equity capital. However, since small firms and firms with low profits can realise only low tax savings, the effectiveness of this tax measure is restricted. Within personal income taxation, gross incomes up to 14.500 € per year are completely tax-exempt from 2004 on. This tax cut will reach a volume of € 329 million in 2004 and € 400 million in 2005. Moreover, several kinds of social security contributions and payroll taxes for older employees will be lowered. These tax cuts are compensated, however, by the increase in energy and mineral oil taxes and in contributions to public health insurance. Thus no expansionary effect can be expected from the first phase of the tax reform.
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