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German Minister for Economic Affairs and Energy Sigmar Gabriel attends a news conference in Berlin July 21, 2014. REUTERS/Axel Schmidt

(reuters_tickers)

By Erik Kirschbaum

BERLIN (Reuters) - The German government can lower income tax rates before the next elections due in 2017 by eliminating "bracket creep" thanks to a projected increase in tax revenues from a new minimum wage, Economy Minister Sigmar Gabriel said on Sunday.

The anomaly of "bracket creep", or "cold progression" as it is also known in Germany, stems from the country's tax laws. Unlike major economies such as the United States, Britain and France, thresholds in Germany's progressive tax system are not automatically adjusted. This means that an individual's pay rise can trigger a net pay cut.

Even though his centre-left Social Democrat (SPD) party has resisted eliminating the current system, Gabriel and several regional leaders in Chancellor Angela Merkel's conservatives said tax reform should be possible before the four-year legislative period ends.

"I'm convinced that we can tackle difficult issues like eliminating 'cold progression' without raising other taxes," said Gabriel, who is also SPD chairman, in an interview with ZDF television. "I'm quite certain that we can come to a result in this legislative period."

The Organisation for Economic Cooperation and Development (OECD) has urged Germany to address the problem via the introduction of index-linked tax brackets.

Critics complain the system "picks wage-earners' pockets" by hoisting them into higher tax brackets as their earnings rise. But government budgets have long relied on the extra funds it brings - up to four billion euros a year.

Increasing numbers of conservative and SPD politicians now see scope to reduce it with the federal government on track for a balanced budget in 2014 for the first time in 40 years.

PAY RISE CAN MEAN NET PAY CUT

Under the current German tax system, a single person who earns 40,000 euros per year and gets a 2 percent pay rise could see net income actually fall due to bracket creep, which would result in an increase in taxes of 3 percent.

When asked how the government could make up for the four billion euros of lost income, Gabriel said that the introduction of a minimum wage in Germany from 2015 would bring in new tax income and lower state costs for social welfare support.

"We'll have, for example, a giant reduction in expenditures and a giant increase in income thanks to the minimum wage," he said, referring to the 8.50-euro pay threshold that his party insisted on introducing as their price for joining a grand coalition government with Merkel.

"That'll mean more people are paying into the social welfare system with the minimum wage and that'll mean we're paying out less in social welfare spending. I believe we should give part of that back to the middle-income wage earners."

The issue of scrapping "cold progression" has come up repeatedly in recent years but has never been tackled because the governments are so reliant on the income. The SPD has insisted any cuts must have matching financing.

Merkel's chief of staff Peter Altmaier poured cold water on the idea, telling the Saarbruecker Zeitung newspaper: "At the moment there isn't any scope for making any such promises."

Some conservatives would nevertheless like to see the tax cut by 2016 ahead of regional elections in states that the SPD or their erstwhile Greens allies rule: Baden-Wuerttemberg, Rhineland-Palatinate, Berlin and Mecklenburg-Vorpommern.

Der Spiegel magazine reported on Sunday that conservative Saxony state premier Stanislaw Tillich, who faces an election next month, and Saxony-Anhalt's state premier Reiner Haseloff want to push Merkel's Christian Democrats (CDU) to support eliminating "cold progression".

(Reporting By Erik Kirschbaum; Editing by Stephen Powell)

Reuters