Germany's coalition races to agree income tax reform as SPD pushes relief for middle earners and CDU warns against pure redistribution

The black-red coalition under Chancellor Olaf Scholz is racing to finalise a reform of the income tax that would take effect on 1 January 2027. Finance Minister Lars Klingbeil (SPD) has put two options before the coalition leadership: a smaller package worth roughly ten billion euros and a larger one of around twenty-five billion euros. Both are meant to deliver relief for small and medium incomes, but the parties remain at odds over how to pay for them and whether a higher top tax rate should be part of the deal.

What the SPD demands

The SPD is making the reform a make-or-break issue for its base. Annika Klose, labour and social policy spokesperson for the parliamentary group, told public broadcaster RBB that her party must “bring something home” from the talks. She stressed that those with high incomes and wealth must contribute more to overcome the economic crisis.

The expectation is crystal clear: the rich must be taxed more and those with low and middle incomes must be relieved.

SPD chair and Labour Minister Bärbel Bas had earlier floated a target of 500 euros in annual net relief per household. A model prepared by the ZEW research institute and circulated within the coalition envisages relief of 520 euros for employees with a taxable income up to 40,000 euros, after which the tariff would remain unchanged to avoid relief spilling over to top earners.

The CDU draws red lines

CDU deputy parliamentary group chair Mathias Middelberg warned the SPD against turning the reform into a pure redistribution exercise. “A tax reform only makes sense if it helps the recovery,” he said, insisting that any relief must be at least partly counter-financed through cuts in government spending.

If the urgently needed relief for low earners is achieved only by placing even more burdens on other contributors and businesses, better to leave it alone.

General Secretary Carsten Linnemann did not rule out a higher tax rate on top incomes but stressed that the middle class and craft trades must be spared. He also said that if the SPD’s 500-euro relief promise cannot be fully offset, it should not go ahead: “Everything else is unserious.”

Klingbeil’s two proposals and the numbers on the table

The Finance Ministry described the proposals as “ambitious” but stressed that all coalition partners must now move. The smaller variant would deliver relief of just over ten billion euros, the larger one around twenty-five billion. The reform is the heaviest piece of a broader legislative package the coalition wants to launch this week.

FDP demands deeper cuts

FDP vice-chair Wolfgang Kubicki went further than the CDU, calling for a radical reduction in subsidies and inefficient state expenditure. “There’s a lot you can do, more than Carsten Linnemann imagines,” he told WELT TV, urging the coalition to lower the overall tax level and fund it exclusively through savings.

The ticking legislative clock

To have the law ready for 1 January 2027, the draft must reach tax consultants and taxpayers by the end of November 2026. With the parliamentary summer recess imminent and both the Bundestag and Bundesrat still needing to sign off, the coalition committee meeting on Wednesday 1 July is the last realistic opportunity for agreement. A preparatory meeting at the Chancellery on Sunday yielded no breakthrough; insiders described the talks as “work in progress” with “no white smoke” yet. CDU leaders remain optimistic that a deal will be stitched together on Wednesday, calling the process normal for such a complex package.