Germany's upper house of parliament yesterday killed off an ambitious plan by Chancellor Helmut Kohl's centre-right government to overhaul the country's tax system. The decision by the Bundesrat, where the opposition Social Democrats enjoy a majority, became inevitable after the government and opposition failed to agree a compromise on the tax plan.

The plan would have cut corporate and personal taxes and simplified complex rules in an effort to boost investment and create jobs in a country where unemployment has reached 11 percent.

It would also have reduced the so-called "solidarity surcharge" imposed following reunification to help rebuild eastern Germany.

The government and the opposition only agreed one item: to abolish a tax on business capital viewed by many as a deterrent to investment.

Both sides agreed that non-wage labour costs should be reduced but they were unable to agree on how this should be financed. The SPD and the Greens wanted to fund a cut in social insurance contributions by raising the tax on petrol and adding one percentage point to Value Added Tax.

Dr Kohl's favourite to succeed him as chancellor, Wolfgang Schauble, proposed a compromise which would have increased the petrol tax but it was abandoned after the smaller coalition parties refused to back it.

The SPD argued that the plan was tilted too heavily in favour of big business and high earners and that it did not do enough to alleviate the tax burden on the less well off. With a top income tax rate of 53 per cent and hefty health and social insurance contributions, many Germans take home less than half their gross pay every month.

Neither Dr Kohl nor the opposition are expected to propose a new tax reform before next September's general election but the issue of taxation is likely to dominate the campaign.