German Chancellor Friedrich Merz's ruling coalition unveiled a broad reform package on July 2, 2026, that provides roughly €10 billion in annual tax relief targeted mainly at lower and middle-income earners, alongside pension and labor reforms [1, 2, 3]. The tax relief will take effect January 1, 2027 [2].

The package funds these cuts primarily by raising top income tax rates. The highest rate will reach 47% for incomes above €280,000 according to some sources, while others report a tiered increase to 45% above €250,000 and 47% above €280,000 [1, 2, 3]. Lars Klingbeil said, "The highest earners in this country will therefore take on a larger share. That is fair, so that our country can move forward" [2].

A working family with two children and a taxable household income of €60,000 is expected to receive more than €600 in annual tax relief [3]. Merz said, "We want to get Germany back on track," and highlighted efforts to "cut taxes" and reduce bureaucracy to ease burdens on employees and businesses [1, 3].

Labor reforms include scrapping the policy allowing sick notes by telephone and requiring a doctor’s certificate from the first day of illness instead of the fourth [1, 2, 3]. The package also doubles the maximum duration of fixed-term contracts without cause to 48 months [2] and allows bakeries and pastry shops to extend Sunday opening hours [3].

The government plans to reduce federal ministry staffing by 8% through digitization while cutting various mandatory reporting requirements [1, 2, 3].

Changes to the pension system are also included, with legislation implementing recommendations from a government pension commission expected by the end of 2026 [1, 2]. Merz said the coalition is "demonstrating that we possess the strength and the determination to lead Germany into the future," ensuring more agility for businesses and safeguarding the social welfare system [3].

The package responds to political pressure as the coalition trails the far-right Alternative for Germany party in recent opinion polls [1, 2].

The next key steps include the start of tax relief on January 1, 2027, and the passage of pension reform legislation by the end of this year [2].