Key facts
- German coalition leaders have reached an agreement on a tax reform package.
- The reform aims to provide tax relief for low- and middle-income earners.
- Taxes for high earners will increase, with rates rising to 45% and 47% for incomes above €250,000 and €280,000 respectively.
- The deal includes measures to boost Germany's export-oriented economy and domestic competitiveness.
- The agreement seeks to counter declining popularity of the governing coalition and the rise of the AfD party.
German Chancellor Friedrich Merz announced a coalition agreement on Thursday to cut taxes for low- and middle-income earners and implement broader economic reforms. The deal is intended to revive Germany's stagnant economy and address the declining popularity of his ideologically divided government, which faces pressure from the rising far-right Alternative for Germany (AfD) party.
The tax reform is expected to provide around €600 in annual savings for a household of two adults and two children with a taxable income of €60,000. This relief will be financed by increasing taxes on high earners, raising the top rates to 45% for incomes of €250,000 and above, and 47% for incomes of €280,000 and above.
In addition to tax changes, the coalition leaders agreed on measures to bolster Germany's export-oriented economy. These include a new trade strategy prioritizing European production in strategic sectors like infrastructure and defense, with public funding programs to protect against unfair competition from China. SPD Finance Minister Lars Klingbeil emphasized a focus on "European production — that is, local content" in these key areas.
Further measures to boost domestic competitiveness involve incentivizing work on Sundays and making it more difficult for workers to take sick leave, a point Chancellor Merz has previously criticized. These announcements follow recent agreements on pension system reform and controlling health insurance premiums.
Merz expressed his expectation that these measures will improve public approval of the government, stating, "I expect that as soon as it becomes clear that we are staying on the right track with these measures, public approval of the federal government will rise." The reforms still require approval from the full cabinet and passage through parliament before they can be enacted.