The German government, under the leadership of Economy Minister Katarina Reiche (CDU), is reportedly exploring further tax relief measures for businesses, alongside a controversial proposal to consolidate social welfare programs. Details emerging from a draft of the upcoming annual economic report, leaked to the Handelsblatt newspaper, reveal a potential shift in fiscal policy that is already drawing criticism and sparking internal debate.
One proposed legislative initiative, slated for 2026, focuses on “further improvements to the structure of corporate taxation”. A key element of this involves making the “election model” – allowing partnerships to be taxed as corporations – more attractive. Currently, many partnerships opt for income tax rather than corporate tax and this change would potentially incentivize greater corporate tax revenue, although critics argue it could also encourage tax avoidance strategies and disproportionately benefit larger firms.
Simultaneously, the draft report introduces a plan to merge Bürgergeld (basic income support), Wohngeld (housing allowance) and Kinderzuschlag (child benefit) into a single system. The Ministry claims this consolidation could reduce the “transfer avoidance rate” – the incentive for individuals to avoid paying taxes and social security contributions – and potentially spur significant economic activity. Projections suggest a potential increase of up to 149,000 full-time equivalent jobs and savings for public finances reaching as high as €4.5 billion. However, the proposal is already generating concern, with opponents suggesting it risks eroding vital social safety nets and creating bureaucratic complexities.
Crucially, the proposals outlined in the draft economic report are not yet finalized and face significant hurdles. An internal memo obtained by Handelsblatt highlights the ongoing and reportedly challenging, negotiations with ministries led by the Social Democratic Party (SPD), indicating “substantial adjustment requests” are being made. The SPD, traditionally a champion of social welfare programs, is likely to scrutinize the potential impact of the merger proposal on vulnerable populations and may propose significant modifications.
The release of these draft proposals ahead of the official presentation in late January underscores the political sensitivity surrounding the government’s economic agenda. While the CDU aims to stimulate economic growth through corporate tax relief and streamline social programs, the potential consequences for income inequality and social support are expected to dominate the ensuing political debate. The success of these initiatives hinges on navigating the complex coalition dynamics and addressing potential opposition from both within and outside the government.
