Ifo Institute criticizes Germany's planned 2027 income tax reform

The Ifo Institute has criticized the German government’s planned 2027 income tax reform, stating it is more about compensation than economic stimulation. Ifo President Clemens Fuest noted that the reform primarily offsets bracket creep caused by inflation rather than providing genuine relief to drive employment or growth.

The reform is expected to cost the state budget 10 billion euros. Under the proposal, the top tax rate will increase for high earners: individuals with taxable income above 278,000 euros will face a 45 percent rate, rising to 47 percent for income above 280,000 euros. When including the solidarity surcharge, this group will pay nearly half of every additional euro earned. Researchers warned this could turn Germany into a high-tax country for top incomes, often impacting partnerships and medium-sized enterprises.

As an alternative, Ifo researchers suggested that converting spouse splitting into real splitting, abolishing the solidarity surcharge, and reforming social benefit reductions could increase the labor supply by 200,000 to 400,000 full-time positions without additional costs to the state budget.