Germany is about to cut corporate taxes as part of its new leader’s plan to reignite growth. Though it might sound like President Trump’s economic agenda, which also features a large and recently passed tax cut, it is anything but.
The tax bill approved by Germany’s upper house of Parliament on Friday is a throwback to what increasingly feels like a bygone era in Western policymaking.
An early and important plank of Chancellor Friedrich Merz’s economic agenda, it has been pitched, and critiqued, in the language of classical economics. The bill has stirred little controversy and generated relatively few headlines this week.
In those ways, it is a contrast to the so-called “big, beautiful” tax-cut bill that Mr. Trump signed this month, even though the German and U.S. bills shares a central tenet: that countries can attract more investment by reducing the taxes that business owners must pay.
Mr. Merz’s bill was expected to become law later Friday, with a signature from the nation’s president, who largely holds a ceremonial role.
Reviving Germany’s economy, Europe’s largest, is the most important challenge facing Mr. Merz, officials across the government say.
If he fails to do so, they said, a spreading sense of malaise could empower the far-right Alternative for Germany party, which finished second in the February election, and vault it to victory in the next federal campaign.
The legislation reflects a compromise between Mr. Merz’s center-right Christian Democrats and its coalition partner, the center-left Social Democrats, led by Germany’s new finance minister and vice chancellor, Lars Klingbeil. It provides immediate tax breaks for businesses that invest more in Germany, while gradually cutting corporate tax rates, among other provisions.
Government officials, including Mr. Klingbeil, say the changes will help boost German productivity and investment. They project that the effects will be enhanced by a surge in government spending following a deal Mr. Merz shepherded before he took office. That agreement loosened rules on government borrowing to allow increased spending on defense, critical infrastructure, projects related to climate change and other priorities.
Still, government officials have not promised anything like the growth surge that Mr. Trump’s top economists claim the United States will enjoy from his tax bill.
Unlike Mr. Trump and his aides, German officials do not say their tax cuts will pay for themselves through increased growth and government revenue.
And unlike Mr. Trump, the Germans say that for the cuts to be most effective, they will need to be coupled with lower barriers to trade and more skilled immigration — at a time when Mr. Trump is restricting immigration to America and threatening higher tariffs on trading partners around the world.
Mr. Merz told lawmakers this week that his government had “initiated a turnaround in economic policy” for Germany.
“None of us is doing this lightly,” Mr. Merz said in a speech to Parliament. “We know that this will place a considerable burden on future budgets, including interest obligations in future budgets. But the alternative — doing nothing, not enabling investment, especially from the private sector in Germany — is not a better option.”
For Mr. Merz, the tax bill marks a pivot point. He won the chancellorship this winter in an election that was often dominated by promises to fix an economy that is projected to barely grow this year after not recording any net growth, adjusting for inflation, over the previous five years.
Yet after taking office, Mr. Merz dove first into foreign policy, traveling more in his first weeks on the job than any postwar chancellor as he sought to reassert German leadership on the European and global stage.
Back home, his economic agenda navigated a series of small early controversies. State governors complained the tax cuts would crimp their budgets as well. Mr. Klingbeil and Mr. Merz took heat among their own coalition members for a plan to reduce electricity taxes, mostly for large manufacturers, which fell short of initial government promises to include more relief for consumers.
But government officials forged ahead with the tax and spending plans, while beginning companion efforts to reduce some government regulations and peel back some of Germany’s famed paperwork burdens for businesses.
Internal economic modeling projects that the tax bill will increase economic growth by 0.2 percentage points next year and 0.4 percentage points in 2029, as corporate tax cuts phase in, Finance Ministry officials said. Mr. Trump’s team projected more than a percentage point of added economic growth annually from his recently signed bill, a forecast significantly higher than other government agencies or even conservative analysts outside the administration.
The German government estimates grow when factoring in the boost from additional borrowing, as the country seeks to raise its national security spending sharply to 5 percent of gross domestic product annually. The new spending and tax cuts combined could increase the growth boost to 1.5 percentage points by 2029, according to the Finance Ministry projections.
Mr. Merz’s economic moves have won some early praise, including from Jamie Dimon, the chief executive of mega financial firm JPMorgan Chase, who called the strategy “exactly the right thing” in an interview this week with the German news outlet Handelsblatt.
“Merz’s approach holds great potential for the German economy, with strong growth and new jobs,” Mr. Dimon said.
German economists are more skeptical. Many experts say Mr. Merz has taken good steps toward improving the economy, but they warn that he has pushed off difficult budgetary choices that could hinder his efforts. (Mr. Trump has faced similar criticism.)
While officials have said an early burst of infrastructure spending will focus on overhauling the nation’s troubled rail service, there is not yet an overarching plan for where most infrastructure money will go and what it will fund. Officials are still debating spending strategy.
Economists also warn that some of the newly borrowed money will likely patch existing holes in a budget strained by an aging German population. That will only push off questions about whether to cut spending or raise taxes, instead of investing in improvements that could help make the economy more competitive, like digitization of government services or further transportation upgrades.
Clemens Fuest, the president of the Ifo Institute, a German research group, said in an interview that Mr. Merz’s tax plan was merely “OK.” He criticized some provisions that he said were unlikely to boost growth, like reduced taxes for restaurants and for overtime pay. He also said the corporate tax cuts would give “some stimulus to investment, and that’s fine.”
He said Mr. Merz still had more work to do to overhaul spending on the social safety net and encourage Germans to work more, which he called crucial changes to right the economy.
“In many aspects, he has the right ideas,” Mr. Fuerst said of the new chancellor. “The difficulty is the implementation.”
Christopher F. Schuetze contributed reporting.
Jim Tankersley is the Berlin bureau chief for The Times, leading coverage of Germany, Austria and Switzerland.
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