German Cabinet Approves Tax Reform Aimed at Lower and Middle Incomes
Berlin, September 2 – Following extensive debate, the German cabinet today approved a draft income tax reform proposed by Finance Minister Lars Klingbeil (SPD). The black-red coalition government seeks to signal relief amidst widespread concerns over high energy and fuel prices. The reform, set to take effect from early 2027, is primarily designed to benefit millions of households with small and medium incomes and families with children. Conversely, higher earners are expected to contribute more.
Key Changes and Financial Impact
The reform is projected to deliver approximately ten billion euros in annual tax relief. This figure was solidified by the leaders of the Union and SPD during a coalition committee meeting in early July. According to the Ministry, Klingbeil has implemented this political agreement 'one-to-one' in the draft bill. The Vice-Chancellor emphasized that ten billion euros is a significant sum. The full relief volume is expected to be achieved in two stages by 2028.
Interestingly, Klingbeil himself missed today's cabinet meeting. He is currently stranded in the USA after a technical issue with his government plane prevented his return flight on Tuesday (local time) following his participation in the G20 finance ministers' meeting in North Carolina. Details regarding the damage to the German Air Force flight readiness machine were not immediately available.
Overview of the Reform's Core Elements
The reform now moves to the Bundestag and Bundesrat. It is important to note that tax payments are not directly calculated from gross wages but from 'taxable income' after deductions for allowances and deductible expenses.
Basic Tax-Free Allowance
The portion of income that remains tax-free to secure the minimum subsistence level for everyone will be gradually expanded:
- From 12,348 euros this year to 12,564 euros next year.
- Further increase to 12,900 euros in 2028.
Top Tax Rate
For income above the basic tax-free allowance, there are tariff zones where taxation also increases with rising taxable income. The top tax rate of 42 percent will now apply slightly later – from 70,600 euros instead of 69,879 euros. This will flatten the tax rate increase for the income zone between 17,800 and 70,600 euros, primarily benefiting middle incomes.
'Rich Tax'
The 'rich tax' will be split:
- The 45 percent tax rate will now apply to taxable incomes from 250,000 euros, down from the previous 277,826 euros.
- A new 'super-rich tax' of 47 percent will be introduced for incomes above 280,000 euros.
Employee Lump Sum Allowance
The lump sum allowance for employees, which can be claimed for work-related expenses such as travel costs or office supplies, will be increased from 1,230 euros to 1,430 euros.
Children
Child benefits, currently 259 euros per child per month, will increase to:
- 267 euros next year.
- 272 euros in 2028.
The child tax allowance will also rise from 9,756 euros, initially to 10,056 euros, and then to 10,236 euros.
Sunday Surcharges
The maximum permissible hourly wage for tax-free surcharges for Sunday and public holiday work will be increased from 50 to 75 euros. This aims to allow employees to retain more of their surcharges. Conversely, the possibility of deducting craftsmen's services from tax will be slightly reduced.
Expected Benefits for Taxpayers
The Ministry of Finance states that the reform should result in a higher net income for the vast majority of taxpayers. For example, a couple consisting of a nurse and a bus driver, each earning 2,800 euros gross per month with two children, could expect an annual relief of 632 euros in 2028. For a single individual, such as an engineer earning 5,000 euros gross, the relief in 2028 compared to this year would be approximately 192 euros.
Critics from the business sector argue that the reform provides insufficient impetus for economic growth.
Source: dpa-infocom, dpa:260902-930-618889/1
