(de-news.net) – By 2028, Germany’s proposed two-phase income tax reform, which would increase taxes on high earners while concentrating on lower- and middle-class households and families, would provide taxpayer relief of roughly 10 billion euros. In order to promote growth, the Economy Ministry is advocating for more comprehensive measures against inflation-driven bracket creep and structural tax adjustments.
According to reports, the German Cabinet has agreed on a two-phase income tax reform that would provide taxpayers with roughly 10 billion euros in combined relief by 2028 compared with 2026. The draft legislation, prepared by the Federal Finance Ministry under Finance Minister Lars Klingbeil, is expected to be approved by the Cabinet on Wednesday. Its measures are designed primarily to benefit taxpayers with low and middle incomes and families with children, with part of the cost covered by higher taxes on high earners. The package therefore combines broad-based tax relief with targeted increases at the upper end of the income scale.
Under the proposal, the basic tax allowance would rise from its current level of 12,348 euros to 12,564 euros in 2027 and then to 12,900 euros in 2028. The progression of the income tax schedule would also be flattened up to taxable annual income of 70,600 euros, effectively extending the range over which the second stage of the progressive schedule applies. Although taxpayers with higher incomes would also receive some benefit, the Finance Ministry expects the largest proportional gains to go to middle-income households. For a family with two children and an average income, the combined measures would translate into annual savings of more than 600 euros.
Families would receive additional relief through higher child benefits. The monthly payment per child is scheduled to increase from the current 259 euros to 267 euros in 2027 and 272 euros in 2028. Child tax allowances would also be raised, while the standard employee deduction for work-related expenses would increase from 1,230 euros to 1,430 euros in 2027. At the same time, the maximum hourly wage qualifying for tax-free Sunday and holiday bonuses would rise from 50 euros to 75 euros. As a result, a larger number of employees working on Sundays and public holidays could potentially receive such bonuses without the associated tax burden.
The reform would not, however, fully offset the effects of so-called bracket creep for all taxpayers. This occurs when inflation raises nominal incomes enough to push taxpayers into higher tax brackets, creating an effective increase in taxation even though their real purchasing power has not necessarily improved. The government has justified the partial adjustment by emphasizing its decision to concentrate relief on households with low and middle incomes. As a result, the proposal leaves some inflation-related effects on the tax burden unaddressed.
Higher taxation of high earners would provide part of the financing for the package. For single taxpayers, the 45 percent top-rate surcharge, commonly known as the “rich tax,” would apply to taxable annual incomes above 250,000 euros. A new 47 percent rate would begin at 280,000 euros. Additional revenue would come from reducing the annual tax credit for household craftsmen’s services, cutting the maximum from 1,200 euros to 900 euros. Employers’ flat tax on mini-job wages would also rise from 2 percent to 5 percent, while further tax preferences are to be eliminated through separate legislation.
Economy Ministry pushes broader tax relief beyond Cabinet plan
The Finance Ministry said the package reflects the coalition agreement reached on July 2. Earlier proposals for more extensive tax relief reportedly failed to win agreement within the governing coalition because they would have required additional consolidation measures, reductions in tax subsidies and greater tax contributions from wealthier households. The fiscal effects will be felt across all levels of government: the Finance Ministry estimates that the measures would initially reduce tax revenues for the federal government, states and municipalities by about 1.5 billion euros in 2027 and 5.6 billion euros in 2028. Once all measures are taken into account, however, the total relief experienced by taxpayers is expected to amount to about 10 billion euros.
The CDU-led Economy Ministry is pressing for a broader response to bracket creep in 2027, putting another dimension of tax policy into the coalition debate. State Secretary Thomas Steffen wrote to Rolf Bösinger, a State Secretary in the Finance Ministry, arguing that the government should provide a complete statutory adjustment based on the seventh tax progression report. That report is expected to be published in fall 2026. The Economy Ministry has also proposed considering an automatic mechanism for adjusting the tax schedule to inflation, sometimes described as a “tax schedule on wheels.” The current reform draft contains only a partial correction for bracket creep, leaving the broader issue unresolved.
The Economy Ministry is also seeking additional tax relief for small and medium-sized businesses organized as partnerships and therefore subject to income taxation. It wants the government to improve the retained-earnings tax preference and the so-called option model, with the changes taking effect in 2027 alongside the income tax reform. As part of a broader structural overhaul, the ministry would further consider a significant adjustment to the income threshold at which the highest tax rate applies, as well as the elimination of the remaining solidarity surcharge. These proposals would extend the discussion beyond the immediate two-stage reform and toward wider changes to the structure of the income tax system.
At the center of the Economy Ministry’s position is the expectation that tax policy should reinforce the government’s growth agenda through targeted relief rather than impose additional direct tax burdens. The ministry argues that higher marginal rates at the top of the income distribution may not generate substantial additional revenue over the medium term because taxpayers already face high overall tax burdens and may respond to further increases in ways that limit the expected revenue gains. At the same time, it maintains that inflation-driven increases in effective taxation should be avoided. That combination of concerns underpins its call for a more comprehensive approach to adjusting the tax schedule and addressing the effects of inflation on taxpayers.
