(de-news.net) – Germany’s governing coalition is advancing a broad tax agenda that combines income tax relief for households with new levies intended to raise government revenue and influence consumer behavior. The federal cabinet has approved an income tax reform expected to provide 10 billion euros in annual relief, with the main beneficiaries intended to be families and low- and middle-income earners. However, criticism from business groups, trade unions and political parties has raised questions about whether the measures will adequately protect purchasing power amid inflation and how the additional tax burdens will affect households and companies.
The income tax changes are scheduled to begin in 2027, with their full effects expected in 2028. The tax-free basic allowance, which protects income needed to meet basic living expenses, would rise incrementally from 12,348 euros in 2026 to 12,900 euros in 2028. The income threshold for the 42 percent top tax rate would also increase, from 69,879 euros to 70,600 euros. At the upper end of the income scale, the existing 45 percent rate would apply to annual earnings beginning at 250,000 euros, while a new 47 percent rate would cover incomes exceeding 280,000 euros. The standard allowance for work-related employee expenses would increase from 1,230 euros to 1,430 euros.
Families with children would receive additional support through higher child benefits and tax allowances. Monthly child benefits would initially rise from 259 euros per child to 267 euros, followed by a further increase to 272 euros. The child tax allowance would reach 10,236 euros by 2028. According to the Finance Ministry’s estimates, a household consisting of two parents earning 2,800 euros in gross monthly income each and raising two children could save 632 euros annually in 2028. An individual earning 5,000 euros gross per month would receive approximately 192 euros in annual tax relief. These examples illustrate the government’s intention to deliver tangible benefits to a broad section of taxpayers, although the size of the gains would vary according to household circumstances and income.
Finance Minister Lars Klingbeil (SPD) has defended the reform as an effort to increase disposable income for most taxpayers while requiring higher earners to shoulder a greater share of the tax burden. He has also indicated that parliamentary deliberations could create opportunities to expand relief for households with low and middle incomes. Members of the Union parties’ bloc, however, have called for additional measures to address so-called cold progression, whereby inflation-related wage increases push taxpayers into higher tax brackets without delivering a corresponding improvement in real purchasing power. The debate therefore extends beyond nominal tax reductions to the question of whether households will experience a meaningful improvement in their financial position.
Opposition parties have challenged the proposals on different grounds. The Left has warned that planned increases in consumption taxes could place a disproportionate burden on lower-income households, while the AfD has described the proposed relief as inadequate. The Greens have questioned the relative treatment of direct child benefits and tax allowances, arguing that the arrangements raise concerns about differences in how families benefit. Business representatives have also expressed reservations about additional financial obligations, and the German Trade Union Confederation has argued that the relief would do little more than compensate for inflation. The competing criticisms highlight the difficulty of balancing household support, fiscal requirements and the distribution of tax burdens.
Government advances sugar tax
Alongside the income tax reform, the government is pursuing new levies on sugar-sweetened beverages and plastic packaging. Both proposals are intended to generate additional revenue, while the sugar and plastics measures could also influence consumption and production decisions. Their progress has nevertheless been complicated by disagreements over implementation, particularly concerning the proposed sugar tax. Despite reports of tensions between the Chancellery and the Finance Ministry, the government has maintained that the introduction of the levy remains planned and that discussions center on its precise design.
A revised draft of the sugar tax legislation projects revenue of approximately 775 million euros in 2027, rising to nearly 1.2 billion euros in 2028. Implementing the measure would require additional administrative capacity, including 200 positions in customs administration, 23 jobs at the federal government’s information technology service and further staffing within the Finance Ministry. The proposed levy would therefore entail both additional revenue and new administrative commitments. Disagreements within the government have left uncertainty about the immediate legislative timetable, although officials have expressed confidence that an agreement can be reached.
Charges on plastics
A separate plastics tax is scheduled to take effect in July 2027 and would charge 550 euros per metric ton of plastic contained in packaging. The proposed measure would cover packaging and composite materials containing more than 5 percent plastic, including films, closures, lids and plastic capsules. The government expects the levy to generate approximately 1.4 billion euros annually from 2028. However, the Finance Ministry’s draft also anticipates costs for public authorities and businesses associated with administration, reporting requirements and compliance. Although companies would be responsible for paying the tax, the proposal anticipates that they could transfer the burden to consumers through higher prices.
The two measures would also require a substantial expansion of administrative resources. Estimates based on the draft legislation indicate that implementing the sugar and plastics taxes could necessitate more than 1,000 additional full-time positions across federal institutions. The plastics tax alone would require hundreds of additional customs employees, alongside staffing at the federal information technology service and the Finance Ministry.
The Federation of Taxpayers has sharply criticized these requirements, arguing that the government is expanding bureaucracy and introducing new taxes instead of reviewing public spending and administrative structures. The projected staffing needs add another dimension to the debate over whether the new levies will deliver sufficient net revenue to justify their implementation costs.
Tobacco tax increase faces revenue uncertainty
The planned tobacco tax increase is intended to serve two objectives: generating additional federal revenue and reducing cigarette consumption in Germany. Calculations attributed to the Finance Ministry suggest that the measure could reduce the quantity of cigarettes sold by approximately 25 percent. Germany taxed 66.4 billion cigarettes in 2025, meaning that a decline of this magnitude would correspond to approximately 16.6 billion fewer cigarettes. The projection, however, is based on calculations that may be subject to uncertainty.
The Finance Ministry expects the higher tax to generate an additional 11.6 billion euros over four years, with total tobacco tax revenue projected to reach approximately 21.3 billion euros in 2030. Financial and health policy representatives from the Union, the SPD and the Greens have questioned whether the government can achieve these targets. They have pointed to possible changes in consumer purchasing behavior that could reduce the expected revenue, making the fiscal outcome less predictable than the headline projections suggest. The disagreement reflects a broader tension between the two objectives of tobacco taxation: health policymakers generally prioritize reducing consumption, while fiscal policymakers place greater emphasis on revenue generation and budget consolidation. A substantial reduction in cigarette sales could advance the public health objective while simultaneously limiting the additional income available to the federal budget.
SPD renews calls for inheritance tax reform
The SPD has also renewed its demand for changes to inheritance taxation, adding wealth distribution and long-term financial security to the broader tax debate. Secretary-General Tim Klüssendorf has argued that smaller and medium-sized inheritances should not face substantial taxation while wealthy families can transfer assets using existing legal provisions that significantly reduce their tax liabilities. The SPD has repeatedly advocated higher inheritance taxes and an increase in the top income tax rate, but the conservative Union bloc has opposed these proposals, leaving the coalition divided over how the tax burden should be distributed.
Klüssendorf has highlighted regional disparities in inherited wealth, noting that western Germany accounts for 95 percent of taxable inherited assets and gifts. He argues that unequal access to inherited wealth affects both economic opportunity and the ability to secure financial stability in retirement. These concerns are particularly relevant to eastern Germany, where, according to his assessment, many people have fewer opportunities to accumulate additional assets and may consequently depend more heavily on the statutory pension system in old age. The SPD’s position links inheritance taxation to a broader question of whether access to wealth should play such a significant role in determining individual economic prospects and retirement security.
