ifo Institute Proposes Reforming Germany’s Income Tax and Transfer System to Boost Employment

The ifo Institute proposes reforming how families are taxed. This would involve converting joint income taxation into real splitting and increasing child allowances. The proposal also includes adding EUR 500 to the current basic allowance of EUR 10,908 and EUR 200 to the basic tax allowance for business deductions of EUR 1,230. Furthermore, ifo favors abolishing the solidarity surcharge entirely. Instead, the top tax rate and the wealth tax rate would each be increased by 2 percentage points. This new top tax rate of 44 percent would apply as before to annual taxable incomes of EUR 62,809 and above. The new wealth tax rate for people with an annual taxable income of EUR 302,825 and over would then be 47 percent. This raises the income threshold by EUR 25,000. At present, Germany’s top tax rate is 42 percent, and its wealth tax rate is 45 percent. The latter applies to annual taxable incomes of EUR 278,000 and above.

“Despite the latest basic income reform, there is still room for improvement. Especially for single people, it would be possible to create additional work incentives that could help them increase their disposable income,” says Maximilian Blömer, ifo researcher and coauthor of the study. To this end, the authors favor reforming the transfer withdrawal rules governing supplementary incomes as follows: Transfer recipients with children would retain the withdrawal-free allowance of EUR 100. Income over that amount and up to EUR 360 would be offset at 80 percent. The offset for incomes of more than EUR 360 would be lowered to 60 percent, the same for households without children. Transfer recipients without children would no longer qualify for the withdrawal-free allowance.