#28: Taxes down?
The coalition wants to lower taxes. But for whom?
This week, the economic institute IW sank its German growth forecast for 2026 from 0.9% to 0.4%.
“The war in Iran has stifled the tentative recovery of the German economy. Rising energy prices and supply disruptions are hitting a country that, after three years of recession and stagnation, has hardly any reserves left,” said IW economist Michael Grömling.
The government is clammering to reduce costs for businesses and normal people in the hope they’ll consume and invest more.
Last week I looked at the Merz government’s healthcare reforms — essentially a package of spending cuts totalling €15 billion with the intention of keeping statutory insurance contributions stable for a few years.
Another major area the CDU/CSU-SPD coalition is tinkering with is tax reform.
The main idea seems to be to reduce tax on middle-income people.
Not exactly an easy project when you’re already running a budget deficit of at least 119 billion for the year.
It gets even more difficult when you have two coalition partners from different political camps: the cenre-right CDU/CSU and the centre-left SPD.
Finance minister Lars Klingbeil (SPD) is pushing a plan that would lower the tax burden for 95% of taxpayers.
In a nutshell, Klingbeil wants to raise the threshold for the top tax rate to €83,500, up from €69,879.
The SPD proposal is more progressive and would benefit lower and middle earners more.
The devil is in the details
SPD wants to bump up the “top rate.” from 42% to 47%. And increase the “rich people tax” rate to 49% for incomes over €250,000.
Meanwhile, CDU/CSU wants to keep the top rate at 42% and is maybe okay with a slightly lower “rich people tax” for those earning over €210,000.
The graph below helps us visualise the SPD plan as well as the CDU/CSU’s counterproposal.
The rates in the graph (thanks, Focus magazine) are “effective rates” on total income after accounting for the basic tax-free allowance (Grundfreibetrag) or €12,348 for individuals and deductions.
The grey line is the current tax rate for different income brackets.
The red line represents the SPD plan.
The black line represents Merz’s CDU/CSU counter-proposal.
Additionally, the SPD want to raise inheritance tax on people inheriting assets worth at least €26 million and lower the tax for smaller inherited sums.
To makes things more complicated, CDU/CSU want to totally scrap the Soli or Solidaritätszuschlag, a 5.5% surcharge on your income tax. The Soli was originally conceived to finance investment in former East Germany but that’s no longer the case — and now it’s paid by just the top 10% of earners, people who pay at least €20,000 in income tax. Scrapping it would be quite a large tax cut for those with more.
My take
I’m with Klingbeil here. Wealthy people in Germany are paying too little.
What's crazy about this debate is what isn’t being talked about.
It's a well-known fact that the wealthy have many, many ways to help them drastically lower their taxable income — and therefore their tax payments.
A few examples:
Expenses for private schools, au pairs, cleaners, home improvements etc are all tax-deductible.
Smart investment in real estate allows high-income folks to save massively on their taxes.
Profits on the sale of privately owned homes (which the well-off are more likely to own) are tax-free if you wait 10 years to sell.
If you buy gold, coins, jewelry, vintage cars and many other assets and then sell them after one year, your profits are 100% tax-free.
The tax on capital gains (stocks, etc) is a flat 25%, lower than the upper tax rate. Wealthier individuals are much more likely to own stocks, ETFs and other investment vehicles.
Wealthy individuals and families save massive amounts of taxes by setting up holding companies and family offices to invest in real estate, stocks etc.
I could go on and on. YouTube is full of tax advisers like the one below who call Germany a “tax paradise” and offer the tantalizing possibility of paying zero tax. Probably an exxageration and there’s certainty a grifter vibe here but they’re not wrong.
In short, while I agree with the SPD and Lars Klingbeil that the rich need to pay a bit more, nobody’s talking about the real problem of tax loopholes, exceptions and privileges that high earners are more likely to profit from.
And one more thing about lowering income tax for regular workers:
High tax itself isn’t the full problem, rather the high social contributions. A single person with a salary of €3,000 will see about €35 tax on their pay slip but a whopping €652 going to health, pension, unemployment and old-age care contributions. And yes, all of these contributions are capped for people with high salaries — or those people can opt out of statutory insurance and state pension funds altogether i.e. the rich.
Yes, Germany is rigged to the benefit of the rich. The “little guy” deserves a break.
Back to reality: Is the SPD’s tax relief plan going to happen? Probably not.
On a talk show on Sunday, Merz said the CDU/CSU would NOT raise taxes for high earners.
This could be a major sticking point for the coalition — which is already looking very shaky.
Thank you for reading.
Maurice
What else happened this week?
👴 Why Friedrich Merz decided to risk Donald Trump’s wrath
🤖 Google expands Gemini in Germany
🤖 Germany pushing for looser AI rules
👂Palestinian writer Alaa Al-Qaisi reads her essay “Better Than Berlin”
📺Germany just made a huge mistake - Yanis Varoufakis & Wolfgang Munchau
💰 Money-Saving Tip of the Week from Smart Living in Germany
Your SCHUFA score affects a lot of life in Germany – from renting an apartment to getting a credit card. But you don’t need to pay €29.95 for the official report to keep an eye on it. Tools like bonify let you check your SCHUFA score for free, as often as you want. A quick check now and then helps you spot anything odd before it becomes a problem – and since SCHUFA now discloses how scores are calculated, free tools can also show you which factors are pulling yours up or down.
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