Overview: DIW chief predicts a VAT increase as an easy political route
In 2026 Marcel Fratzscher, president of the German Institute for Economic Research (DIW), warned that the governing coalition of Union and SPD could raise the standard value-added tax (VAT) from 19% to 21% to plug a budget gap of more than €130 billion projected for 2027–2029. He described a VAT hike as the “path of least resistance” for policymakers facing opposing pressure within the coalition, and cautioned that such a move would generate significant revenue while hitting low-income households disproportionately.
Why the coalition might opt for a VAT increase
Fratzscher frames the possible VAT hike as a political compromise driven by three competing constraints: one party rejects tax increases, the other refuses social spending cuts, and both shy away from cutting subsidies. Under those conditions, raising the value-added tax offers a fast, broad-based revenue source that avoids difficult distributional fights in the short term.
Political dynamics and the “easy” option
The VAT increase is attractive politically because it can be implemented quickly and shared across nearly all consumption. For coalition leaders, that can feel like the least painful immediate fix even if it carries long-term social and economic costs. Fratzscher warns this convenience masks serious fairness concerns.
Fiscal numbers and distributional consequences
According to Fratzscher’s assessment, increasing VAT from 19% to 21% would raise roughly €30 billion in annual revenue. That would only cover part of a projected financing shortfall of over €130 billion in the 2027–2029 window, leaving further measures or cuts necessary.
| Item | Estimated Amount (EUR) |
|---|---|
| Projected budget hole (2027–2029) | over 130,000,000,000 |
| Revenue from VAT rise (19% → 21%) | about 30,000,000,000 |
| Volume of climate-harmful subsidies proposed for cuts | about 60,000,000,000 |
| Cost of spouse income-splitting (Ehegattensplitting) | about 22,000,000,000 |
| Total (illustrative) | — |
Who would be affected?
A higher value-added tax is regressive in nature: it raises the price of most goods and services and tends to take a larger share of income from low- and middle-income households than from wealthier households. Fratzscher described such a move as potentially “socially fatal” because it would disproportionately burden people who spend a larger portion of their income on consumption.
Alternatives proposed by Fratzscher
Rather than raising the VAT, Fratzscher recommends a package of measures that aim to be fairer and more targeted. His proposals focus on taxing wealth and correcting distortions that incentivize carbon-intensive or inefficient behavior.
Raising property taxation
Fratzscher argues for a significant increase in property taxation, noting that Germany taxes wealth relatively lightly compared with other industrialized countries. He points out that land and real estate cannot be moved offshore, making property taxation an effective way to raise revenue from wealth owners.
Cutting climate-harmful subsidies
Another major strand of his alternative is reducing or eliminating subsidies that damage the climate and distort behavior. Examples include tax privileges and allowances that lower the effective price of fossil fuels or encourage long-distance commuting. Fratzscher estimates potential savings from removing these measures in the tens of billions.
- Diesel tax advantages
- Fuel and kerosene tax exemptions
- Generous commuter allowances that favor long commutes
Reforming income and labor rules
Fratzscher suggests abolishing the current spouse income-splitting system (Ehegattensplitting) in favor of a real splitting approach that treats household taxation more equitably. He also calls for scaling back marginally paid short-hour jobs often called minijobs, arguing that they create barriers to more and better employment and reduce long-term growth potential.
Criticism and political pushback
Not everyone accepts Fratzscher’s framing. Some commentators warn that higher taxes, including a VAT increase, would hit the working middle class and homeowners, and describe a VAT rise as a heavy-handed solution. These critics argue that political leaders will face vocal public opposition if cuts or tax rises are perceived as unfair.
Economic growth and demographic concerns
Fratzscher cautions that Germany’s growth engine faces structural headwinds from demographics and that a return to robust growth cannot be relied upon to close fiscal gaps. That leaves policymakers with difficult trade-offs: accept tax increases, engineer politically costly reforms, or accumulate further fiscal strain.
What this means and what to watch
The debate over a potential VAT increase highlights a core challenge in public finance: balancing quick revenue-raising measures against fairness and long-term incentives. Important keywords to follow in coverage of this issue include VAT increase, value-added tax, distributional impact, property taxation, subsidy reform, spouse income-splitting, minijobs, and climate-harmful subsidies.
Policymakers and citizens should watch upcoming budget proposals and coalition negotiations to see whether leaders choose the straightforward VAT route or pursue Fratzscher’s alternative package of property tax reform, subsidy cuts, and labor-market changes. The final mix of measures will determine not just short-term fiscal outcomes but also social fairness and incentives for the green transition.
