Income tax: Tradespeople speak of "distortion of competition"

The German Federal Cabinet has approved the reform of income tax. Here's what will change for taxpayers and why small and medium-sized businesses will be more likely to be burdened.

Increased child benefits, higher tax allowances, a new tax on the super-rich, and a slightly reduced tax break for skilled trades services: The German Federal Cabinet has approved the draft of an income tax reform law for 2027. The reform is primarily intended to provide relief for employees with low and middle incomes, as well as families with children. "Work and effort should pay off more – especially for everyone with low and middle incomes," said Federal Finance Minister Lars Klingbeil.

He said he was talking about everyone who keeps things running every day: "Police officers, childcare workers, bus drivers, nurses, tradespeople – and many others who pitch in and work hard," the Vice Chancellor said. Families with children could have more than €600 more in their pockets per year from 2028 onwards than they do today. The total relief package amounts to ten billion euros.

To offset the costs, taxes for top earners are rising. A new so-called "super-rich tax" of 47 percent will apply to annual incomes above €280.000. This is the biggest point of criticism from the business community, as income tax is also the corporate tax for many small and medium-sized enterprises. The planned increase in the flat tax rate for mini-jobs from two percent to five percent is also seen as a burden on employers.

The following measures are specifically planned:

✔️ The basic tax allowance will increase to 12.564 euros (2027) and 12.900 euros (2028).

You might also be interested in:

Operations management

Construction site travel as working time: When do you get paid?

Operations management

European Days of Crafts 2027: Register now

Operations management

Bakers warn against municipal packaging tax

✔️ The second tax bracket will be flattened up to €70.600. According to the Federal Ministry of Finance, this will benefit middle-income earners the most in percentage terms. From this point onward, the top tax rate of 42 percent will apply (instead of from €69.879).

✔️ The wealth tax (45 percent) will in future apply to couples with a combined taxable income of 500.000 euros (previously the threshold was around 555.652 euros and 277.826 euros for singles).

✔️ A new super-rich tax of 47 percent will apply to annual incomes of 280.000 euros and above (560.000 euros for couples).

✔️ Child benefit will increase from today's 259 euros to 267 euros (2027) and then to 272 euros (2028) per child per month.

✔️ The tax allowances for children will increase to 10.056 euros (2027) and 10.236 euros (2028).

✔️ The employee lump sum (for office supplies or travel expenses related to work) increases from 1.230 to 1.430 euros.

✔️ The maximum permissible hourly wage for tax-free Sunday and public holiday bonuses increases from 50 to 75 euros.

✔️ The tax deductibility of skilled trades services is reduced from 20 percent to 15 percent of €6.000 . This means tax relief from up to €1.200 to up to €900 per year (§ 35a paragraph 3 sentence 1 EStG).

✔️ The uniform flat tax rate for mini-jobs will be increased from two percent to five percent (§ 40a paragraph 2 EStG).

The reaction from the business community has been muted.

Holger Schwannecke , Secretary General of the German Confederation of Skilled Crafts (ZDH) , which represents around one million craft businesses in Germany, says the relief measures fall far short of what craft businesses and their employees urgently need right now. "What's needed is substantial relief that creates room for investment, growth, and employment. Instead of the ten billion euros promised after the coalition committee meeting, there will be just around 1,5 billion euros in relief in 2027 and 5,6 billion euros in 2028."

By raising and tiering the top tax rate, combined with lowering the lower limit of the wealth tax rate, the state will in future place a heavier burden on precisely that part of the middle class "that is successful in business, invests and thus potentially creates jobs and training opportunities".

"This means that businesses risk slipping into the highest burden category earlier in the future, without any corresponding increase in income or higher economic performance. This exacerbates the burden on those who invest and take on responsibility."

Three-quarters of craft businesses are sole proprietorships . For them, income tax is the same as business tax. Schwannecke criticizes the fact that partnerships and corporations are still subject to different tax burdens.

"Corporate tax will be reduced equally for all corporations from 2028, while this proposal could lead to a higher tax burden for partnerships. This will distort competition."

The skilled trades sector and the Ministry of Economic Affairs agree that the proposed package is insufficient. They now expect a reform of the tax breaks for retained earnings in sole proprietorships.

Helena Melnikov, CEO of the German Chamber of Industry and Commerce (DIHK), shares a similar view : "The planned income tax reform will provide relief for low and middle incomes, that's correct. However, it's wrong to increase the tax burden on higher incomes in return. Because that will primarily affect the middle class in Germany."

Instead of redistributing the tax burden, the federal government must get its spending under control and enable growth. "Only then will real relief be possible. For the economy to grow again, our companies don't need additional burdens, but rather freedom."

Part-time workers are becoming more expensive for employers

The draft legislation regarding mini-jobs is also misguided from the perspective of the business community. The planned increase in the flat tax rate from two to five percent will make labor even more expensive for employers. ZDH Secretary General Schwannecke stated: "Given the rising demand for skilled workers, employment opportunities should be made easier and more attractive, not more expensive."

It is both welcome and appropriate that the tax breaks for skilled trades services will, in principle, be maintained. This provides incentives for legal employment, stabilizes private investment in renovation, maintenance, and modernization, and promotes small-scale, energy-efficient improvements to existing buildings.

Schwannecke calls on the federal government to create an economic climate and space for growth and investment. "The most effective lever for new momentum would be a reduction in taxes. This would create jobs, income, and room for investment. This planned income tax reform certainly won't achieve that."

What happens next

The draft law will now be debated further in the Bundestag and Bundesrat. Changes are still possible. 

DHB now also available digitally! Simply click here and register for the digital German Crafts Journal (DHB)!