By Erik Kirschbaum
BERLIN (Reuters) - Chancellor Angela Merkel criticized the centre-left opposition for blocking her government's efforts to cut income taxes by 6 billion euros, telling a German newspaper those parties will have to explain that to voters in next year's election.
Merkel, seeking a third term in September, also found fault with Social Democrats (SPD) and Greens in a newspaper interview for thwarting a deal with Switzerland to tax assets stashed by Germans in Swiss banks although without revealing their names.
Taking a rare swipe at the opposition whose support she has needed to get parliamentary approval for a number of euro zone rescue measures, Merkel told the Braunschweiger Zeitung it was hard to fathom that the SPD and Greens had rejected tax cuts that would have benefited middle- and lower-income wage earners.
"It's just not fair and it's actually incomprehensible," Merkel said, according to an excerpt released ahead of publication on Monday. She added that the SPD and Greens would have to explain the veto of tax cuts to the voters.
Merkel's centre-right coalition suffered a defeat late on Wednesday when centre-left lawmakers in a mediation committee stopped a plan to cut income taxes by 6 billion euros - seen by analysts as an election-year gift to voters.
The SPD and Greens, flexing their muscles before next year's election, first used their veto powers in the Bundesrat, the upper house of parliament, to block the plan. Then a mediation committee made up of members of both the lower house, or Bundestag, and upper house also rejected the tax cuts.
The SPD and Greens argued there was no scope for tax cuts, especially because they would reduce revenues to states and towns. They said they would have backed tax cuts for ordinary earners if the coalition had raised taxes on higher incomes.
MERKEL REGRETS SWISS DEAL DEFEATED
Merkel's governing coalition also saw a tax deal with Switzerland blocked by the mediation committee. It would have required Swiss banks to levy a punitive charge on an estimated 150 billion Swiss francs ($160 billion) in undeclared funds tucked away by Germans in Swiss accounts.
She said she was convinced the defeated deal would have been "a good solution for Germany". Merkel said the current practice, where some German states pay for stolen bank data to prosecute German tax dodgers, was not the best way to resolve the problem.
"The random purchase of tax CDs is no substitute for treating and taxing all German-held assets invested in Switzerland the same way as if they were invested on German territory," she said.
Merkel added that the tax accord would have brought in tax revenues of "nearly 2 billion euros and probably a lot more". Most of that money would have gone to the states, she added.
The SPD and Greens, keen to make taxing the rich an election issue, argued the deal would have let tax evaders off the hook.
With the income tax cut, Merkel's conservatives and their Free Democrat (FDP) partners hoped to fulfil a 2009 election campaign promise to cut taxes.
They were trying to level out the effects of "cold progression", also known as "bracket creep". These terms describe what happens when tax thresholds are not adjusted for inflation. Workers getting pay rises sometimes see net pay actually fall because they have entered a higher tax bracket.
Thanks to the "bracket creep" in the tax code, Germany's treasury takes in three billion euros in extra revenues each year.
(Reporting By Erik Kirschbaum; Editing by Mark Heinrich)