The Organisation for Economic Co-operation and Development (OECD) has stressed the need for Germany to implement economic reforms to achieve sustainable growth. The priorities include making the tax system more equitable and environmentally friendly.

In its Economic Survey of Germany 2014, the OECD pointed out that there is scope to lower taxes on labor and reduce welfare contributions, particularly for low earners, as part of efforts to increase the economy’s growth potential. The survey noted that government revenues are heavily dependent on the taxation of labor income, with low-wage earners bearing a large part of the effective labor tax burden.

Tax cuts could be funded through increased real estate taxes, which should be levied based on updated valuations. In addition, the tax exemption for profits from the sale of non-owner-occupied properties could be abolished.

More effective environmental taxation would also raise more revenue, the report said. The recommendations include revising the motor vehicle tax to further encourage the adoption of energy efficient cars, and extending the emission-based highway toll for heavy goods vehicles to include light duty vehicles or passenger cars. The OECD said that the levy had increase the uptake of low-emission freight vehicles. The report also said that fiscal support for activities that damage the environment, such as tax breaks for company cars and commuting allowances, should be reconsidered.

There is also scope for removing tax advantages and exemptions in the taxation of capital gains and bequests, the report noted.

Germany is expected to have new spending commitments of about 0.4 percent of gross domestic product (GDP) in 2014 and an additional 0.2 percent of GDP by 2015, with more generous pension entitlements in 2014 accounting for most of the higher spending. Using general tax revenue rather than social security contributions to fund larger pensions could be more employment- and growth-friendly and share the burden more broadly and equitably among all taxpayers, the report concluded.