German Research Institute Warns Tax Reform Will Increase Burden on 98 Percent of Taxpayers

The Leibniz Centre for European Economic Research (ZEW) has submitted an expert statement to the German Bundestag warning that planned income tax adjustments by Federal Finance Minister Lars Klingbeil will result in real tax increases for 98 percent of German taxpayers. The institute determined that the proposed tariff relief for 2028 fails to offset the loss of purchasing power caused by inflation over the coming years.

According to the ZEW analysis, taxpayers with an annual taxable income of 40,000 euros would receive nominal tax relief of 116 euros in 2028 compared to 2026 baseline levels. However, an expected cumulative inflation rate of 5.8 percent across 2026 and 2027 creates an additional tax burden of 306 euros due to bracket creep over the same period. As a result, the planned adjustments cover less than one-third of the inflation-related loss in purchasing power, without accounting for potential shifts in social security contributions or child benefit payments.

Bracket creep occurs when nominal wages rise to match inflation, but tax bracket thresholds are not adjusted to the same extent. Under these conditions, workers face higher tax rates on their earnings without obtaining additional real purchasing power, transferring a larger share of economic output to government revenues without explicit rate increases. Between 2016 and 2026, previous legislation routinely adjusted tax brackets based on inflation projections to prevent such stealth increases for nearly all tax brackets, with automated higher burdens largely limited to incomes above 200,000 euros.

Dissent regarding the proposed income tax trajectory has also emerged within government departments. Thomas Steffen, State Secretary at the Federal Ministry for Economic Affairs under Minister Katherina Reiche, criticized the draft in a September communication to the Finance Ministry, stating that the omission of complete compensation for bracket creep leads directly to inflation-driven tax hikes. Within opposition ranks, CSU financial expert Florian Dorn characterized the measure in an internal meeting as inadequate, while the CDU/CSU parliamentary group has so far refrained from taking a strong public stance.

Written by Freya Stensrud freya.stensrud@alpineweekly.com