German coalition plans income tax cuts for low and middle earners from 2027

Germany's black-red coalition government plans to cut income tax for people earning between 2,500 and 3,000 euros gross per month, effective January 1, 2027, according to the Finance Ministry. The relief would amount to 100-200 euros per year for low earners and up to 400 euros for middle earners, DIW economist Stefan Bach calculated. Bach attributed the modest sums to progressive taxation: lower earners pay a lower percentage in tax and therefore receive less absolute relief.

Financing the reform remains disputed among coalition partners. Bach estimated annual revenue losses of 20-30 billion euros from the tax cut, money that must be recouped elsewhere.

The SPD parliamentary group leader Matthias Miersch said: "We have not only the wealth tax, but we also have the top tax rate that we need to talk about." The top tax rate of 42% applies from a taxable annual income of 69,879 euros for single filers. Chancellor Friedrich Merz rejected any increase: "We have a burden on skilled workers with taxes, on the middle class with income tax, that is too high. And then I will not talk to the SPD about a further tightening."

The wealth tax (Reichensteuer) of 45% applies from a taxable annual income of 277,826 euros for single filers. Two CDU/CSU lawmakers proposed raising the wealth tax to 47.5% from 210,000 euros, conditional on abolishing the solidarity surcharge. CSU parliamentary group leader Alexander Hoffmann called the proposal a "big step" toward the SPD. However, Bach noted that raising the wealth tax by one percentage point would yield only about 1 billion euros in additional revenue, as few taxpayers are subject to it.

The SPD proposes exempting only family businesses worth up to 5 million euros from inheritance tax, tightening current exemptions that allow business assets to pass largely tax-free under certain conditions. Ifo economist Andreas Peichl said such an inheritance tax reform could generate 4-6 billion euros in additional revenue, though the proceeds would go to the states, not the federal government. The Union is cautious, warning that the reform could weaken Germany as a business location if companies are forced to sell.

A proposal to raise VAT from 19% to 21% was rejected by both the SPD and the CSU. Miersch said higher VAT would disproportionately burden lower incomes. CSU leader Markus Söder stated: "I cannot imagine that happening." Peichl noted that a VAT increase could bring 15 billion euros annually for the federal government alone and argued economically it makes more sense to tax consumption slightly more than income.