German Chancellor Merz Announces €10 bn Tax Cut for Middle Incomes

On 2 July, German Chancellor Friedrich Merz presented a 34‑point reform package aimed at revitalising the economy. The plan includes an annual tax relief of about €10 billion for low‑ and middle‑income earners, achieved by lowering the income‑tax rate for earners up to €40,000 and raising the top rate from 45 % to 47 % for incomes above €280,000. The package also raises the basic personal allowance, child allowance and child benefit (to €272 per month by 2028), and adjusts the progression zone to curb “cold‑progression”.

Fiscal simulations predict an additional 50‑60 000 full‑time jobs and secondary revenue effects of €1.5‑2 billion per year. The reforms are slated to take effect on 1 January 2027, with the tax relief beginning in 2028. Families with two earners stand to benefit most; for example, a couple each earning €2 800 per month would receive about €632 in annual tax relief.

The package also calls for an 8 % reduction in federal ministry staff, stricter proof of illness for sick‑leave claims, and measures to make Sunday trading more attractive. Unions praised the tax relief but criticised the rise in temporary contracts, while some economists said the reforms alone would not solve Germany’s structural challenges.