Germany's Coalition at Loggerheads Over €30 Billion Tax Cut – Who Pays the Bill?

Germany's coalition debates sweeping income tax reform: CDU wants higher thresholds, SPD insists on revenue neutrality. Wealth tax, subsidy cuts, or VAT considered.

The black-red federal government is locked in a high-stakes negotiation over what would be the most sweeping overhaul of the personal income tax in years. The goal: transfer a tangible net gain to the pay slips of ordinary employees. The obstacle: no one agrees on how to foot the bill.

Finance Minister Klingbeil has promised that roughly 95 percent of all workers will see a lighter tax burden once the reform takes effect. That means flattening the so-called "Mittelstandsbauch" – the steep upward curve in the tax rate that kicks in at relatively modest income levels, a quirk that labor-market experts say discourages skilled professionals from taking on more work.

At present, the basic personal allowance stands at €12,348. The top marginal rate of 42 percent applies from €69,879 in annual income, and the "wealthy tax" rate of 45 percent bites above €277,826. All three thresholds are slated to shift upward significantly. Yet the coalition partners are locked in a tug-of-war over both the thresholds and the financing mechanism.

Two opposing models on the table

The Christian Democratic Union (CDU/CSU) wants the 42-percent rate to start only at €85,000 of annual income. At the same time, it proposes raising the wealthy tax rate to 47.5 percent – but lowering the bar to €210,000. The conservatives also demand the full abolition of the solidarity surcharge (Solidaritätszuschlag), a levy that has long outlived its original purpose of funding reunification.

The Social Democratic Party (SPD) insists on a revenue-neutral reform – meaning every euro of relief granted to lower earners must be offset by higher contributions from the top. The Union is open to increasing the wealthy tax rate, but it rejects any general rise in the top marginal rate of 42 percent.

The estimated cost of the entire package: somewhere between €20 billion and €30 billion, with the final figure depending on the exact design.

Financing models that could break the deadlock

Wealth tax: DIW president Marcel Fratzscher has revived the idea of reintroducing a net-wealth tax – a tool Germany has not used since the constitutional court struck down the old version in 1997. His proposal: a 2 percent levy on net wealth above €20 million, which he calculates could raise roughly €42 billion annually. The German Trade Union Federation (DGB) goes further, calling for a tax starting at €1 million.

Subsidy cuts: Union politician Jens Spahn floats a more radical route – slashing all federal subsidies by a flat 5 percent to free up room for tax cuts.

Value-added tax: The Ifo Institute has floated an increase in VAT as a possible source of revenue, but researchers warn that it could reignite inflation.

Fratzscher sums up the core contention: the current system burdens labor heavily while leaving vast accumulations of wealth largely untouched. A mix of higher top rates and a new wealth tax, he argues, could finance nearly €30 billion in middle-class relief. Whether the coalition can bridge its internal divide before the legislative draft is due in July remains the biggest question in German fiscal politics right now.