Federal Cabinet approves draft income tax reform

The Federal Cabinet today approved the draft for an income tax reform by Finance Minister Lars Klingbeil (SPD) - without the Finance Minister himself, who was stuck in the USA due to a plane breakdown.

There had been a long wrangling over the reform. The black-red coalition wants to send a signal of support with the reform. It is expected to bring relief of around ten billion euros annually. The full relief volume is to be achieved in two stages by 2028. Millions of households with small and medium incomes as well as families with children are expected to benefit. The relief is to be counter-financed, among other things, by a higher tax burden on very high incomes.

What specific measures are planned?

In general, tax payments are not determined directly from gross wages, but from “taxable income” after deducting allowances and deductible expenses. Here is an overview of important elements of the reform:

How much money do taxpayers save?

In total, the tax reduction, taking into account the counter-financing, is stated to be around 4.5 billion euros for the fiscal year 2027, 6.0 billion euros for 2028 and around 5.7 billion euros for the following year.

According to the Ministry of Finance, families and people with small and medium incomes will primarily benefit from the reform. Accordingly, if the reform takes full effect from 2028, a working family with two children and a total taxable income of 60,000 euros would be relieved of a good 600 euros annually compared to the current status.

For example, a couple consisting of a carer and a bus driver, each earning 2,800 euros gross per month and two children, could expect relief of 632 euros per year in 2028. For an individual such as an engineer with 5,000 euros gross, the relief in 2028 would be around 192 euros compared to this year.

The opposition had doubted the specific information about the exoneration. There has also been criticism from economists.

What is the criticism of the project?

Specific point of criticism: The draft law does not contain any additional compensation for the so-called cold progression. This describes the effect that nominal salary increases are partially offset by inflation and the effect of tax progression. The same applies to additional burdens such as higher social contributions or cuts in other state benefits.

The Treasury argues that the proposed relief would largely offset the impact of cold progression and would, in most cases, result in net relief. Klingbeil pointed out on Deutschlandfunk that the reform was an important step. "But it's no secret that I could have imagined more."

There was criticism of the reform from the Federal Ministry of Economics. Klingbeil responded to this with criticism: "An opposition in the government will ultimately harm everyone," said the Vice Chancellor on the sidelines of a G20 ministerial meeting in the USA.

What's next?

The draft law will now be discussed further in the Bundestag and Bundesrat. Changes are possible and likely, at least in individual points. The income tax reform is scheduled to come into force on January 1, 2027. Some of the new regulations will apply from 2028.