German coalition races to seal tax and reform package before summer break, but financing gap divides SPD and CDU

A race against the summer clock

Germany's black-red coalition is pushing to finalise a large reform package before the Bundestag's last sitting on 10 July. The agenda spans pensions, health, long-term care, labour market rules and, most contentiously, a reform of income tax. Government spokesman Stefan Kornelius described the goal as a "big package", while CSU state group leader Alexander Hoffmann spoke of "tying things together" across all levels. Preparatory talks among party leaders on Sunday were marked by "determination to present a comprehensive set of proposals on 1 July", Kornelius said.

Two tax plans, one large hole

Finance Minister Lars Klingbeil (SPD) has put two models on the table. According to media reports, one envisages relief of just over €10 billion, the other around €25 billion. Both aim to cut the burden on small and medium incomes, a pledge written into the coalition agreement. The 2028 federal budget already has a €30 billion hole, making counter-financing the central dispute. SPD parliamentary state secretary Michael Schrodi confirmed "intensive negotiations" but gave no details.

SPD left sets red lines

A group of left-wing SPD MPs led by labour market expert Jan Dieren and social policy spokeswoman Annika Klose issued a paper demanding reforms must not come at the expense of workers. They reject longer working hours, weaker dismissal protection, waiting days for sick pay or any measure that increases the burden on the population. Instead they propose a one-off wealth levy on fortunes above €100 million, inheritance tax reform, price caps on energy and food, a nationwide rent freeze, and lower social contributions for low earners.

Financing fight: tax the rich or cut spending?

The SPD wants higher contributions from top earners and large inheritances. Deputy parliamentary group leader Wiebke Esdar told dpa: "We are fighting for a reform that finally makes the tax system fairer, and we demand that relief for small and medium incomes is also financed by a greater contribution from the super-rich." CDU general secretary Carsten Linnemann warned against "pure redistribution" and said the government should start by saving one to three percent in each ministry, which he said could reach a double-digit billion sum. FDP leader Wolfgang Kubicki went further, calling for overall tax cuts and deeper spending reductions, citing excessive subsidies.

We are fighting for a reform that finally makes the tax system fairer, and we demand that relief for small and medium incomes is also financed by a greater contribution from the super-rich.

What the reform could change

The current income tax system has a basic allowance of €12,348 (2026). The top rate of 42% kicks in at €69,879 for singles, and the "rich tax" of 45% applies above €277,826. Taxpayers' association president Reiner Holznagel criticised the steep progression: "While in the 1960s a multiple of the average income was needed for the top rate to apply, today sometimes just 1.2 times the average income is enough." The coalition wants to shift tariff zones to deliver relief, but the scope depends on how much revenue can be raised elsewhere. A one-point increase in the top rate would yield only about €1 billion, while a one-point VAT rise could bring €16 billion, though it would also fuel inflation already stoked by the Iran war and oil and gas price jumps.

While in the 1960s a multiple of the average income was needed for the top rate to apply, today sometimes just 1.2 times the average income is enough.

Political pressure mounts

With state elections in Saxony-Anhalt, Mecklenburg-Western Pomerania and Berlin in the autumn, the coalition wants to project competence. An earlier summit at Villa Borsig in April ended without a breakthrough. SPD parliamentary manager Dirk Wiese said the party wants to "cross the finish line on central issues". Annika Klose stressed the SPD must "bring something home" from the tax package, adding that the expectation is clear: "the rich will be taxed more and those on low and middle incomes will be relieved."

The expectation is quite clear that the rich will be taxed more and that those with low and middle incomes will be relieved.