Tax Clash Deepens as CDU and SPD Struggle Over Budget in Coalition Talks

Coalition Talks Reach Critical Phase Amid Sharp Divides on Tax Policy

As coalition negotiations between the conservative CDU/CSU alliance and the center-left SPD enter their final phase, the two sides remain locked in a fundamental conflict over taxation. The debate has become a central obstacle to forming a new government, with both camps defending opposing fiscal ideologies. The outcome of these negotiations will define the financial course of Germany’s next legislative period, and shape how infrastructure, defense, and social reforms will be funded.

With Friedrich Merz (CDU) positioned to become the next chancellor, and Markus Söder (CSU) and Lars Klingbeil (SPD) among the leading negotiators, the talks have reached what insiders describe as the “decisive stage.” High-level meetings are now focused entirely on issues of tax, debt, and public investment. Yet, the parties remain distant on core financial questions, particularly surrounding income taxation, corporate relief, and wealth redistribution.

CDU/CSU Rule Out Tax Hikes, Push for Cuts Despite Budget Shortfalls

The conservative bloc has made it clear: there will be no tax increases. Both Söder and Alexander Dobrindt (CSU) have publicly ruled out raising taxes under any circumstances, rejecting SPD proposals to increase rates for high-income earners. Söder reaffirmed this in a national interview, stating that “tax increases are completely off the table.” Instead, the Union wants to lower income taxes, reduce the corporate tax burden, and eliminate the solidarity surcharge altogether.

The CDU/CSU proposal includes adjusting the threshold for the top income tax bracket, with the 42 percent rate only applying to annual incomes above €80,000 instead of the current €68,500. At the same time, they want to ease the so-called “Mittelstandsbauch,” the middle-income tax bulge that disproportionately affects the working middle class, by flattening the progression curve and mitigating the effects of inflation-related bracket creep.

Additionally, the Union supports cutting the corporate tax rate on retained profits to 25 percent and lowering the basic corporate income tax from 15 to 10 percent. These measures, however, face strong resistance from the SPD, which questions how such broad tax cuts could be funded when the federal budget is already stretched.

SPD Proposes Wealth Redistribution and Targets Capital Gains

In contrast, the SPD has proposed a fundamentally different approach to taxation. The party insists that Germany cannot afford large-scale tax cuts without compromising essential public investment. SPD leaders argue that high-income individuals and wealthy households must contribute more to secure the country’s financial stability.

Their plan includes increasing the top income tax rate from 42 to 47 percent for annual earnings over €83,600, and raising the wealth tax for top earners to 49 percent. The SPD also seeks to reinstate a federal wealth tax, abolished in 1997, and introduce reforms to inheritance taxation. These would target loopholes and exemptions currently used by large estates and business transfers, ensuring what SPD officials describe as a “minimum effective taxation” on inherited wealth.

Capital gains from the sale of privately used properties would also face taxation under SPD proposals, even after the current ten-year exemption period. Additionally, the SPD aims to raise the flat rate on investment income from 25 to 30 percent. The party justifies these measures as necessary steps to fund infrastructure, education, and social services in a period of rising global uncertainty and domestic fiscal pressure.

Budget Gaps Highlight Growing Tension Over Public Investment

The dispute over taxes is directly tied to the broader question of how Germany will fund its massive infrastructure and defense investment plans. Both parties supported recent emergency legislation that relaxed the constitutional debt brake, allowing the federal government to raise €500 billion in new funds. These resources are earmarked for military modernization, climate protection, and critical infrastructure such as roads, bridges, railways, schools, and hospitals.

However, SPD negotiators, including Manuela Schwesig (Minister-President of Mecklenburg-Vorpommern), insist that the long-term budget must remain viable. “It’s not enough to take out loans,” Schwesig warned. “We must clearly explain where the money will come from.”

She also stressed the need to speed up investment, urging a move to “German speed” for planning and implementation. While the new debt package provides temporary breathing room, structural reforms and consistent revenue sources remain necessary. For the SPD, this means taxing wealth more fairly and closing gaps in the system. For the CDU/CSU, it means removing barriers to economic growth and returning to balanced budgets without raising taxes.

Welfare Reforms Also Part of Budget Dispute

Aside from taxes, welfare policy has also become a point of contention. The Union is pushing for the complete abolition of the current Bürgergeld (citizen’s income) system, to be replaced by a stricter “new basic security” program. This revised system would classify individuals unwilling to work as non-eligible for public support, a move Söder claims could save billions. The SPD has reportedly shown some flexibility in this area during talks, acknowledging public skepticism over the current welfare model.

Still, the SPD is concerned about ensuring support for low-income workers and maintaining broad relief for the working class. Both parties agree on the goal of easing the burden on average earners but differ sharply on how to achieve it and who should finance it.

Political Stakes Rise as Coalition Deadline Nears

With just weeks remaining before Easter, the pressure is mounting to finalize a deal. Söder compared the process to a papal conclave, with observers watching for signs of breakthrough. “There is no alternative to this coalition,” Söder said, pointing to the joint support both parties gave to the debt expansion legislation as proof of shared purpose.

However, the unresolved differences on taxation and budget structure remain significant. Public attention is focused on how the parties will bridge the gap between tax cuts and fiscal responsibility. Meanwhile, questions continue about whether the promised investments in infrastructure, defense, and climate will proceed without clear financial foundations.

The negotiations are being closely followed not only by German voters but also by financial markets, regional governments, and European partners, all of whom are eager to see how the next German government plans to fund its ambitious agenda without risking long-term stability.