Merz Government Proposes Significant Tax Cuts - Aiming for Major Modernization

The Merz administration is set to initiate substantial tax reductions, primarily benefiting corporations, as part of its economic reform strategy. Federal Finance Minister Lars Klingbeil has reportedly begun laying the groundwork for these tax cuts, which are expected to unfold over several years, culminating in a projected total relief of EUR17 billion by 2029.

According to sources, the proposed tax reforms include the introduction of an 'investment booster,' a reduction in corporate tax rates, and new depreciation allowances for electric vehicles. The investment booster aims to provide special depreciation allowances for businesses investing from 2025 through 2027, allowing for a 30% write-off for investments made between June 30, 2025, and January 1, 2028.

Following this, the corporate tax rate is slated to decrease from 15% to 10% by 2032 in a series of five incremental reductions. Additionally, a more generous framework for research tax credits is anticipated, alongside enhanced depreciation rates for companies purchasing electric vehicles, which would see a 75% write-off in the year of acquisition.

These tax cuts are designed to provide a cumulative relief of EUR2.5 billion in 2025, increasing to EUR8.1 billion in 2026, and reaching EUR11.3 billion by 2029. However, these measures come at a cost to government revenue, with projected shortfalls of EUR630 million in 2025, EUR4 billion in 2026, and EUR17 billion by 2029. These losses will be distributed among federal, state, and local governments.

In a broader context, the Merz government faces pressure to enhance Germany's competitiveness. The nation has been criticized for its high tax burdens, which have been deemed detrimental to its business environment. Analysts have noted that Germany has become a high-tax country over the past 15 years, leading to disadvantages in international competition. Tax reductions are seen as a potential catalyst for revitalizing private investment, which has lagged in recent years.

According to a report by the OECD, the average corporate tax burden across member countries stands at 23.6%, whereas EU nations outside of Germany average 21.1%. In Germany, corporate tax rates hover around 30%, prompting calls for reform from various industry stakeholders.

The German industry has been vocal about the need for decisive structural reforms and a clear fiscal strategy to foster a favorable investment climate. Tanja Gönner, the CEO of the Federation of German Industries (BDI), emphasized the importance of tax relief and reducing bureaucratic hurdles to stimulate necessary investments. She urged the government to implement a progressive depreciation model and reduce the corporate tax rate to a more competitive level of 25% while advocating for the abolition of the solidarity surcharge.

In light of these developments, Finance Minister Klingbeil has expressed optimism that increased investments will drive economic growth, ultimately replenishing government revenues. He has stated that this initiative represents the most significant modernization effort in decades, aimed at revitalizing the economy through enhanced competitiveness and investment.