The tax cuts, amounting to up to €10 billion ($14 billion), could take effect just before the 2013 election and help boost the fortunes of the government's troubled junior coalition partner, the Free Democrats (FDP).
But high-ranking members of Merkel's own Christian Democrats (CDU) have expressed opposition to the plans.
Finance Minister Wolfgang Schäuble, a CDU member, said he did not see the necessity for the cuts, calling them unrealistic and the public debate over the plans "somewhat unfortunate."
"We don't have a lot of leeway in the budget for tax cuts," he told the Bild am Sonntag newspaper.
"The tax rates in Germany are below the average of other industrialized nations and we are facing big budgetary challenges."
That critique was echoed by fellow CDU member Georg Schirmbeck, the party's budget expert.
"If the government brings the tax plans to the Bundestag, they're not going to find a majority for this kind of nonsense," he told the Saturday edition of the Neue Osnabrücker Zeitung.
But Horst Seehofer, the head of the Christian Social Union, the Bavarian sister party of the CDU, said he supported the plans pushed forward by the business-friendly FDP.
"There will be tax cuts in this legislative period, but they will be done in accordance with our economic situation and without endangering our planned budget consolidation," he told the news magazine Focus.
The FDP, traditionally a big supporter of lower tax rates, had made cuts a central requirement for joining the centre-right coalition after the last election. But tax reductions have been off the table for years.
Now, however, that Germany's economy is powering ahead, the wind seems to be heading in the direction of possible cuts. Reducing the tax burden could help the FDP, which has seen support plummet and its former head, Guido Westerwelle, step down due to his and the party's growing unpopularity.
The head of the CDU parliamentary group, Volker Kauder, said the economic situation in Germany was strong enough to make tax relief possible. He also called for a reduction in social insurance premiums, like payments into the state health insurance and pension schemes, as another strategy to reduce the tax burden on middle-class Germans.