Taxes on labour

In Germany approximately two thirds of value added that arises from additional earned income goes to the state in the form of personal income tax, employee and employer social insurance contributions as well as value-added tax, which is also a tax on the value added of human labour. This is the result of a new study by the Ifo Institute that examines the marginal tax rate for various household types. These findings apply - with slight fluctuations in the individual results - for all the examined types of households with average earnings (single or dual-income married couples with two children; western or eastern Germany). Also taking into account the coalition agreement of the new German government, the situation does not change much. In 2007 the marginal tax burden of a single person with an average income will be 68.1% (2005: 68.0%), and for a dual-income family (one average salary plus one third) and two children will stand at 63.8% (2005: 64.2%). In eastern Germany a single, employed person will have a marginal tax rate of 64.9% (2005: 65.1%) in comparison to 64.2% (2005: 63.7%) for a family. The reforms of the Grand Coalition will have no positive effect on the marginal tax rate. Without the coalition agreement, the marginal tax rate of the sample family would be 63.7%, only minimally lower than the 63.8% as in the coalition agreement. The reason is that the increase in the value-added tax has a somewhat stronger effect than the lowering of the social insurance contributions. This will not help revive the labour market or reduce the incentives to work in the shadow economy. The marginal tax burden is much more favourable for a typical household in the USA (only 38%) and in the United Kingdom (ca. 49%). Even Sweden, the Netherlands and Denmark have lower marginal tax rates. Only in France does the state pocket more of additional value added, ca. 70%, than in Germany.