Public Hearing on the 2027 Income Tax Reform
On 4 November 2026, the Finance Committee of the Deutscher Bundestag deliberated on the Federal Government’s draft 2027 Income Tax Reform Act at a public hearing. The hearing featured some strong criticism of the proposed changes. In particular, several experts considered the planned adjustment for fiscal drag to be inadequate.
In principle, the draft provides for the Act to enter into force on 1 January 2027. Under Article 7 of the Federal Government’s draft, certain provisions are not intended to take effect until 1 January 2028. The legislative process has not yet been completed.
Key Changes in the Federal Government’s Draft
Higher Tax-Free Allowances and Increased Child Benefit
Under the draft, the basic personal allowance is to rise by EUR 216, from EUR 12,348 to EUR 12,564. From January 2027, child benefit is to be increased from EUR 259 to EUR 267 per child per month.
The Federal Government expects the reform both to stimulate growth and to give greater consideration to distributional issues. According to its figures, the total tax relief provided to taxpayers in 2027 and 2028 is expected to exceed EUR 10 billion. Not all experts at the hearing shared this assessment.
Changes to Income-Related Expenses and Premium Payments
The standard employee allowance for income-related expenses is to be increased from EUR 1,230 to EUR 1,430. As a result, approximately 1.3 million taxpayers would no longer have to itemise their income-related expenses individually in Annex N of their tax return.
In addition, the draft provides for changes to the preferential tax treatment of premium payments for work on Sundays and public holidays. The maximum eligible basic hourly wage under § 3b Abs. 2 Satz 1 EStG (German Income Tax Act) is to be increased from EUR 50 to EUR 75.
At its meeting on 16 October 2026, the Bundesrat issued its opinion on the Federal Government’s draft pursuant to Art. 76 Abs. 2 GG (German Basic Law). It requests that consideration be given to refraining from increasing the maximum basic hourly wage and instead moderately increasing the premium rates of 50 and 125 per cent, respectively. According to the Bundesrat’s opinion, once fully effective over an entire year, the proposed increase in the basic hourly wage would result in tax revenue shortfalls of EUR 70 million.
Restrictions and Funding Measures
The Federal Government’s draft combines the proposed tax relief with several changes that would increase the tax burden. These include, in particular:
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The tax credit for tradespeople’s services is to be reduced from 20 per cent to 15 per cent of eligible expenses. At the same time, the maximum amount is to fall from EUR 1,200 to EUR 900.
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The flat-rate tax applicable to mini-jobs is to be increased.
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The so-called top tax rate of 45 per cent is to apply at a lower income threshold.
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A further tax bracket with a rate of 47 per cent is to apply to taxable income of EUR 280,000 or more.
Including the solidarity surcharge, the proposed tax burden in the new bracket would amount to just under 49.6 per cent.
Criticism of the Adjustment for Fiscal Drag
Business Associations See No Comprehensive Rate Reform
Germany’s leading business associations welcomed the planned expansion of the preferential tax treatment of premium payments for work on Sundays and public holidays, as well as the increase in the standard employee allowance for income-related expenses. In their assessment, however, the draft falls well short of a comprehensive reform of income tax rates.
In particular, they criticised the fact that, unlike in previous years, the income thresholds for the various tax brackets are not to be adjusted in line with expected inflation. According to the associations, the changes to the taxation of high incomes would predominantly affect business income.
Bund der Steuerzahler Expects Higher Burdens in Some Cases
The Bund der Steuerzahler called for fiscal drag to be eliminated in full and for all income thresholds for the various tax brackets to be adjusted adequately. In its assessment, the volume of tax relief would amount to no more than EUR 7 billion and would therefore fall short of the figure of more than EUR 10 billion stated by the Federal Government.
Moreover, the adjustment for fiscal drag was inadequate. Numerous income groups could therefore expect a higher tax burden. Overall, the Bund der Steuerzahler was highly critical of the draft.
DIW Considers Relief for Middle-Income Workers Inadequate
The Deutsches Institut für Wirtschaftsforschung stated that the proposed provisions would provide virtually no relief for middle-income workers. To create the necessary fiscal headroom, the Institute advocated reducing tax breaks and subsidies and improving the efficiency of government benefits and spending programmes.
The Leibniz-Zentrum für Europäische Wirtschaftsforschung likewise concluded that the draft would only partially offset expected inflation. For 98 per cent of taxpayers, the proposed tax relief would fall short of fully offsetting inflation.
Objections to Higher Tax Rates
Doubts About Additional Revenue
A professor of public finance invited at the suggestion of a committee member expressed doubts as to whether the proposed 47 per cent tax bracket would generate additional government revenue. In his assessment, if the political objective was to impose a greater burden on high incomes, tax planning opportunities should first be examined before tax rates were increased.
The Bundessteuerberaterkammer also pointed to potential economic consequences. Despite the government’s difficult revenue situation, it was necessary to take into account that a continuously increasing burden on successful businesses could adversely affect future tax revenue.
According to its opinion, both the application of the 45 per cent tax rate at a lower income threshold and the new 47 per cent tax bracket would affect successful owners of small and medium-sized businesses. They were already facing high energy and labour costs as well as challenging economic conditions.
Impact on Pass-Through Businesses
Another expert found the draft lacking in comprehensive tax relief. He described the high tax burden, combined with extensive bureaucracy, rising social security contributions and high and increasingly unpredictable energy costs, as a significant disadvantage for Germany as a business location.
He was particularly critical of the fact that the higher taxation would also affect pass-through businesses. This could reduce their propensity to invest. In his assessment, too, the draft would only partially offset fiscal drag.
Another expert considered that the draft provided neither meaningful relief for taxpayers nor adequate impetus for growth. Among other things, he advocated completely abolishing mini-jobs and the deductibility of tradespeople’s services. He also supported abolishing the top tax rate and the solidarity surcharge and, as a funding measure, introducing a uniform VAT rate of 17.5 per cent.
Diverging Assessment Due to the Budgetary Situation
Arbeitnehmerkammer Considers Full Adjustment Unaffordable
The Arbeitnehmerkammer Bremen, which participated in the hearing at the suggestion of a member of the Finance Committee, considered a full adjustment for fiscal drag to be unfeasible given the budgetary situation. Although relief for low-income earners was appropriate, it could be achieved only to a limited extent through income tax reform. The persons concerned frequently paid no income tax or only a small amount.
The Arbeitnehmerkammer viewed positively the fact that at least part of the relief is to be funded through adjustments within the income tax rate structure.
IMK Warns of Additional Pressure on Public Budgets
According to the Institut für Makroökonomie und Konjunkturforschung, the proposed changes would not offset fiscal drag. The tax burden on single persons and families could increase by 2028 even if their incomes merely rose in line with the price level.
Nevertheless, the Institute opposed further tax relief in the short term. Such relief would place additional pressure on the budgets of the federal, state and local governments.
DGB Calls for a Higher Basic Personal Allowance
The Deutscher Gewerkschaftsbund considered both the current basic personal allowance and the increases planned for 2027 and 2028 to be too low. It called for the basic personal allowance to amount to at least EUR 15,800 in 2027.
The DGB also advocated ending the preferential treatment of mini-jobs under tax and social security law. However, this must not make small part-time employment arrangements more attractive to employers.
Further Legislative Process
The Bundesrat has already issued its opinion on the Federal Government’s draft. Once the Bundestag has adopted a resolution, the Bundesrat must consider the Act again and make its final decision. The proposed provisions may still be amended before the parliamentary process is completed.
The differing assessments presented at the hearing demonstrate that the adjustment for fiscal drag, the burden on business income and the proposed funding measures, in particular, remain contentious. Businesses, investors and private individuals seeking an assessment of the reform’s potential tax implications for their individual circumstances can obtain tax law advice from MTR Legal.
