BERLIN (Reuters) - Germany's Social Democrats (SPD) have drafted a law to discourage corporations from granting high pay packages to top managers by capping the tax deductions they can get through writing them off as business expenses.


The SPD, which has veered to the left under its new leader Martin Schulz, presented a draft law on Wednesday to limit the tax deduction at 500,000 euros ($524,900.00) annually for members of a listed corporation's management board.


Board members in large corporations can earn much more in salary and benefits, but payments above that level - which are currently tax-exempt business expenses - would cost the company more in tax because it could not write them off.


The center-left SPD has been rising in opinion polls since Schulz left the European Parliament for domestic German politics to run against the veteran Angela Merkel in September.


In a poll published on Sunday, it surged past her Christian Democrats (CDU) and their Bavaria-based Christian Social Union (CSU) sister party for the first time since 2006, scoring 33 percent to their 32 percent.


"We do not have a dog-eat-dog capitalism in Germany, rather a model of a social market economy," SPD parliamentary faction leader Thomas Oppermann said after party leaders approved the draft law.

The SPD, the junior coalition partner in Merkel's government, would only submit the law to parliament if the conservatives agree to the draft, as mandated in a coalition agreement between the two parliamentary blocs.

Merkel has backed the idea of putting a cap on tax deductions for executive pay packages, but some Christian Democrats oppose it and say companies would surely appeal against it in the Federal Constitutional Court.

The German public and media have criticized carmaker Volkswagen <VOWG_p.DE> for multi-million euro compensation payments to top executives despite the company's stock plunging on the back of a scandal over false diesel emission levels.

The SPD draft law suggests the supervisory boards of listed companies should be able to cut senior executives' pay packages and claim back extra pension benefits if they perform poorly.

In addition, the bill would allow shareholders at the annual general meeting to agree on a maximum ratio between senior management compensation and the average salary in the company.

($1 = 0.9526 euros)

(Reporting by Matthias Sobolewski; Writing by Joseph Nasr)