Coalition agrees on tax reform: average households to pay around 600 euros less from 2027

At the heart of the package is a reform of income tax with a volume of around ten billion euros annually, which according to Merz provides "from a taxable income of 280,000 euros a rate of 47 percent". The "Programme for Recovery and Employment" is, according to the coalition leaders, designed so that the relief "has the strongest effect for families with children; with this, the coalition is specifically easing the everyday lives of families". The reform is to enter into force on 1 January 2027 and achieve its full effect in 2028.

Who is paying for the relief?

According to the coalition leaders, the project is to be financed primarily through an adjustment of the so-called wealth tax (Reichensteuer), which affects high incomes but not large assets. What is planned is a splitting of the previous top tax rate into two tiers. The SPD had previously advocated for a higher top tax rate and a higher inheritance tax, which the Union rejected. Also previously discussed were a VAT increase, subsidy cuts or budget savings.

In return for the tax cuts, employees are in future to be required to submit a sick note again from the first day of illness. The possibility of sick notes by phone, introduced during the COVID-19 pandemic, is to be abolished. "A mandatory submission of a sick note from the first day of illness is to be introduced," the programme stated. So far, a medical certificate has only been required from the fourth day of illness. According to Merz, exceptions to the new rule are to be possible at company level. The step is justified by high levels of absenteeism in companies.

Pensions and bureaucracy on the agenda

In addition, the Union and SPD agreed to implement the proposals of the Pensions Commission "one to one". The commission, made up of politicians and experts, is to present its reform proposals by the end of the year. A timetable was expected on Thursday, it was said. Agreement was also reached on reducing reporting and documentation obligations as well as less bureaucracy in tax returns. On data protection, Germany is to be brought back to the European minimum standard.

Following the agreement, the coalition is increasing child benefit and the basic tax-free allowance, as well as the child allowance and the employee flat-rate allowance. Tariff-based Sunday and public holiday bonuses are also to be made tax-free up to an hourly wage of 75 euros. Mini-jobs, however, will be taxed at a higher flat rate. The coalition has also provided for compensation for tax shortfalls at the level of the federal states and municipalities.

Voices from the coalition

In the labour market part, the contribution to unemployment insurance is to be kept stable. Federal Labour Minister Bärbel Bas, SPD co-chair, announced that the coalition wants to create more employment through economic growth and take targeted action against benefit fraud. "Those who abuse the system must reckon with consequences," said Bas. There were initially no changes to the current working time regulations. Also planned is an appointment guarantee for specialist doctors as part of the Primary Care Physicians Act.

CSU leader Markus Söder assessed the decisions as proof "that the coalition is capable of compromise and action". It was admittedly not the "big bang" alone, but a "further step out of the crisis". Merz likewise emphasised that there would not be "one single big bang", but a series of coordinated measures. The chancellor called the 600 euro relief a "respectable sum". The reforms show "that the political centre, here and today" has the power "to shape and modernise the country". The aim is "that private households can consume, but also that industry can invest".

Already after Easter, the Union and SPD had spent a weekend at Villa Borsig by a Berlin lake trying to put together a larger package; at that time, the negotiations had ended in dispute, and the poll numbers of the governing parties had continued to slide. The current agreement is regarded as the decisive round of negotiations on the question of whether the government can still turn things around before the important state elections in eastern Germany. A savings package for statutory health insurance is already in the parliamentary process.

Background: from dispute to agreement

Lars Klingbeil, SPD co-chair, emphasised that change only succeeds if it is fair. That is why the relief has focused primarily on families with children. Merz also expressly praised the agreed tax relief for low and middle incomes. On Thursday, the coalition will, in all likelihood, present a whole series of concrete measures for reducing bureaucracy. The tax relief is to be set in motion gradually from 2027.

The federal government sees the programme as a contribution to stabilising the social security systems, relieving citizens, and stimulating the recently stagnating German economy. Observers see the package as an attempt to demonstrate capacity for action again after a difficult start in government. In recent weeks, Merz had repeatedly stressed that the reform process would continue after the summer. With a view to the upcoming elections and the economic pressure, the programme is regarded as the central test for the black-red coalition.

What else is coming: care and data protection

There are also to be relief measures in the area of care and health: a mandatory submission of the sick note from the first day of illness is planned. This ends a practice introduced during the Corona crisis. At the same time, structures in the health system are to be improved, for example through the planned appointment guarantee for specialist doctors. A savings package for statutory health insurance is already being deliberated in parliament.

For data protection, it is planned to reduce requirements to the European minimum standard. This is intended to relieve companies and speed up procedures. In tax returns too, there is to be less bureaucracy in future, according to the coalition's wishes. Overall, the decisions provide for both the economy and citizens to benefit equally – for example through a more stable pension development, lower non-wage labour costs and greater planning certainty.

Observers rate the agreement as a political signal to the population. The coalition is under pressure: the SPD has recently lost support in polls, and the Union has also had to give ground. The nights of negotiation were described as tough. In the end, several dozen decisions stood, which must now be put into legislative form in the coming weeks and months. Thursday is also to bring further details, including on the timetable for pension reform.

With the tax relief, the government wants to strengthen purchasing power and thereby boost the economy. At the same time, industrial investment is to be facilitated. The counter-financing through the wealth tax is intended to ensure that public budgets are not harmed. Whether the package delivers the hoped-for effect will become clear in the coming years. What is clear: the coalition has presented itself as capable of acting – at least in this round of negotiations.