German Coalition Cuts Income Taxes but Tightens Labor Rules and Raises Retirement Age

Germany's ruling coalition agreed on July 2, 2026, to a package of tax, labor and pension reforms that includes 10 billion euros in income tax cuts and changes to employment rules. Chancellor Friedrich Merz said the measures would increase business flexibility, cut red tape, protect the welfare state and lower taxes for employees and companies.

The tax relief is projected to leave an average family about 600 euros better off per year.

Finance Minister and Vice Chancellor Lars Klingbeil stated that individuals earning more than 250,000 euros annually would take on a larger share of the tax burden. Pension system changes will eventually raise the retirement age past 67. The coalition also agreed to reduce corporate reporting obligations, scrap the right of employees to obtain a sick note by telephone and allow temporary employment contracts for up to four years.

The government has been in power since May 2025. Merz said the parties are working to overcome Germany's structural economic weakness. The country's export-led industry has faced rising energy and labor costs, tough Chinese competition and U.S.

President Donald Trump's tariffs. The coalition stated it will press for tougher EU action against unfair competition and stricter rules on foreign investment in strategic sectors. Key regional elections are scheduled for September 2026 in eastern Germany.

Business organizations welcomed the plans. Trade union IG Metall described the labor reforms as an attack on workers' rights. Deutsche Bank senior economist Marion Muehlberger said the announcement represented one of Germany's biggest reform packages in decades.