The German Federal Government has approved a significant overhaul of the income tax system. The Federal Cabinet passed the draft legislation on Wednesday, implementing agreements reached by the governing coalition.
According to the Federal Ministry of Finance, the reform aims to ease the tax burden on individuals earning small to moderate incomes, with a dedicated relief volume of ten billion euros. Federal Finance Minister Lars Klingbeil (SPD)-who was absent from the cabinet meeting due to a flight issue in the United States-stated that the changes are designed to financially support families with children, ensuring more money is available at the end of the month. He further noted that the reform intends to create a fairer distribution of the tax load by requiring top earners to contribute more. A new “super-rich tax” of 47 percent would apply to annual incomes starting at 280,000 euros.
The specific measures included in the reform are the raising of the basic tax-free allowance, adjustments to progressive tax brackets, and an increase in child benefits. Additionally, the standard employee flat rate will be raised, simplifying the process for many taxpayers by allowing them to bypass the filling out of Annex N. The reform is slated to be introduced in two phases, becoming fully effective in 2028.
However, the plan has already faced criticism from both the Ministry of Economic Affairs and the opposition Union party. The Union parliamentary group in the Bundestag has announced its intention to further modify the plans during the legislative process.
Fritz Güntzler, the Union’s spokesman for financial policy, commented to the T-Online news portal that the government draft is a “crucial step in the right direction,” as it alleviates burdens on small and medium incomes and strengthens families. While acknowledging that the proposal is positive, he emphasized that the parliamentary procedure will be managed judiciously to see where the bill can still be improved. He indicated that once the minimum subsistence report is available, they will examine whether the basic and child allowances adequately account for the necessary support. Furthermore, he intends to explore opportunities with the budget policymakers to counteract the effects of “cold progression” (inflation eroding real income).
The Federal Ministry of Economic Affairs, however, highlighted that growth, innovation, and competitiveness remain core concerns of the coalition. A letter from Katherina Reiche (CDU) of the Ministry of Economic Affairs, which was publicized on Tuesday, criticized the reform, arguing that it effectively constitutes a “hidden tax increase” because it does not sufficiently compensate for the negative effects of cold progression.
