Germany Blog: A very German tax reform

Research evidence excerpt

Germany Blog: A very German tax reform

Deutsche Bank

Research

Economics Date

Germany Blog 12 June 2026

A very German tax reform

Robin Winkler

The German government is putting the final touches to an income tax reform, as Chief Economist

part of a comprehensive reform package that it plans to announce before the +49-69-910-62178

parliamentary summer break. The cornerstone of the reform, as agreed in the

coalition treaty, is meaningful tax relief for low and middle incomes from 2027 on.

However, the reform will not be a straightforward tax cut.

According to media reports, the SPD-led Finance Ministry plans average tax relief

of up to EUR 450 a year for incomes up to EUR 70k. Even after partial funding

from higher top-income tax rates, the package could still cost about EUR 17

billion a year, or about 0.4% of GDP. If this were the extent of the reform, it would

likely come with a decent short-term growth multiplier: the energy price shock has

knocked consumer confidence, and the limited relief measures that the

government announced in the spring will expire at the end of this month.

However, there is simply no scope for an unfunded tax cut in the core budget, and

the coalition will thus have to agree on ways to fully fund the reform. Ideas floated

in recent weeks range from the usual suspects like cutting subsidies and

broadening tax bases to more controversial measures such as raising the

standard VAT rate or even introducing a wealth tax. Another bone of contention

between Conservatives and Social Democrats is what to do with the solidarity

surcharge. Given these disagreements, a political compromise could well close

the funding gap by downsizing the tax relief itself as well as by consolidating

general expenditures in the budget.