Germany urged to overhaul VAT and income‑tax thresholds amid fairness concerns

A study commissioned by the former FDP‑led finance ministry in 2024 and carried out by the Leibniz Centre for Economic Research (ZEW) finds that many reduced VAT rates in Germany are unjustified, burdening the federal budget with significant revenue losses and disproportionately benefiting high‑earners and specific sectors. The ZEW recommends simplifying the VAT system, possibly abolishing most reduced rates and lowering the standard 19% rate. The government acknowledges the issues but has not committed to implementing the reforms.

An analysis by the Institut der deutschen Wirtschaft (IW) reveals that the German income‑tax top bracket now applies at just 1.4 times the average wage, far lower than its original intent to target only the highest earners. The IW warns that this “cold progression” undermines work incentives and aggravates the skilled‑labour shortage. It calls for moving the threshold to at least two‑ to two‑and‑a‑half times the average wage.

Both studies call for a fundamental reform of Germany’s tax system to restore fairness and economic efficiency.