German Tax Reform Faces Criticism Over "Cold Progression"
Germany's proposed tax reform is drawing sharp criticism for allegedly failing to fully offset "cold progression," potentially leading to a hidden tax increase for citizens. Experts and opposition parties argue the planned relief is insufficient and breaks previous commitments.
Key takeaways
- Germany's proposed tax reform is facing criticism for inadequately addressing "cold progression."
- Experts and opposition parties warn this could lead to a hidden tax increase for citizens.
- The reform includes measures like increased child benefits and a higher basic tax-free allowance.
- Critics argue the planned relief is insufficient compared to potential state revenue from "cold progression."
Germany's federal government has introduced a tax reform plan that is facing widespread criticism. Experts and opposition parties claim that instead of the promised relief, citizens may experience a de facto tax increase due to the failure to fully compensate for "cold progression." This phenomenon occurs when inflation and a higher tax bracket erode income gains.
The coalition government, composed of the CDU, CSU, and SPD, presented the outlines of the reform on July 2nd, with the draft legislation detailing specific measures. The reform is intended to be implemented in two stages during 2027 and 2028, aiming to provide relief for citizens and families, increase the tax burden on high earners, and reduce or eliminate certain tax benefits.
Key provisions include an increase in child benefit payments from 259 euros to 267 euros in 2027 and to 272 euros in 2028. The basic tax-free allowance is slated to rise to 12,900 euros by 2028. Additionally, the employee lump-sum allowance is set to increase from 1,230 euros to 1,430 euros in 2027. The top tax rate of 42 percent will apply to taxable incomes starting from 70,601 euros from 2027. Rules for tax-free supplements for Sunday, holiday, and night work are also to be relaxed.
Criticism of the Reform
Critics argue that the planned relief of approximately three billion euros for employees in 2027 is inadequate, especially considering the state's anticipated higher revenue from "cold progression." The CDU's budget expert, Melanie Bernstein, stated that failing to even compensate for inflation constitutes poor performance, asserting that citizens can tell when they are being exploited. CDU politician Yannick Bury called for revisions, emphasizing that genuine relief requires spending cuts and a smaller state, along with a fundamental review of the budget planning.
Green Party financial expert Katharina Beck accused the government of misleading the public, calling the marketing of the tax plans as relief disingenuous. The Federation of Taxpayers labeled the reform a "joke and provocation," with president Reiner Holznagel calling the decision not to fully compensate for "cold progression" a "breach of promise." He stated that the government is abandoning the legacy of former finance ministers Schäuble and Scholz. Holznagel also described Klingbeil's draft as containing more burdens than reliefs.
A spokesperson for Finance Minister Lars Klingbeil referenced a coalition committee decision and announced that the government would present the 7th Tax Progression Report in autumn 2026, which will be crucial for evaluating "cold progression" in 2027. The financing for the planned reliefs is to be partially covered by...
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