Third Stage of German Tax Reform: Businesses Benefit From a Reduction in Costs of Employing Highly Skilled Workers

The third stage of tax reform significantly decreases the effective tax burden to which businesses are subject for the employment of highly qualified workers. Whilst a business must currently pay around EUR 191,000 in order that a highly qualified worker has a salary of more than EUR 100,000 following tax, subsequent to reform, a business will only have to pay EUR 174,000.

This reflects a reduction in the average effective tax burden for highly qualified employees from 47.6 per cent to 42.6 per cent. A business must therefore spend ten per cent less per annum for a highly qualified worker. This improves Germany’s international competitiveness in terms of its attractiveness as a location in which to employ highly qualified personnel. These are the findings from a simulation method carried out by the Centre for European Economic Research (ZEW), in Mannheim.

The IBC Taxation Index 2003 on Highly Qualified Employees, created by ZEW, indicates the considerable extent to which Germany might improve its competitiveness when it comes to the employment of highly qualified personnel. The IBC Taxation Index provides information regarding the average effective tax burden on businesses on the one hand, and on highly qualified workers on the other. The, "IBC BAK International Benchmark Club"® carries out an annual analysis of the economic situation and the attractiveness of different European locations in terms of employing highly qualified labour. The survey focuses in particular on the locations in the Alps region. The index is calculated by ZEW on behalf of the IBC. Subsequent to the third tax reform, Germany would move up two places in the international ranking from its current position in second-to-last place (see graph). Germany would then rank above the Netherlands, France and Italy. The tax burden in Germany would remain, however, greater than that in Austria, Ireland, Great Britain, the USA and Switzerland.

If the highly qualified worker were to have a salary which, following tax and any other reductions, were double the example sum given in the introduction - EUR 200,000, the tax burden following implementation of the reform would be reduced by approximately 6 percentage points, from 48.8 per cent to 42.9 per cent. Highly qualified employees would therefore cost businesses in Germany less than they would cost firms in the Swiss Cantons of Vaud, Ticino and Geneva. Germany would also rank higher than Austria and Ireland.

When it comes to calculating the effective tax burden on highly skilled workers, differentiations are made for the various wage brackets, for various types of income and for the family status of the highly qualified individuals. The burden calculated also takes tax and reductions into account, which are charged on the earnings at a later point. In particular, national insurance contributions and resulting pension entitlements, as well as relevant taxes, are also considered.

Despite the improved position of Germany in terms of the tax burden on highly qualified workers subsequent to the third tax reform, it should not be forgotten that in comparison to the effective tax burden to which businesses are subject in other countries, the tax burden in Germany remains considerably large. As the IBC Taxation Index for Businesses illustrates, the German tax burden is the largest, second only to that in the USA. The average effective tax burden for businesses indicates how attractive a location is for highly profitable investments.

A summary of the study may be requested using the contact details below

Dr Christina Elschner (ZEW), Telephone: +49(0)621/1235-162, E-mail: elschner@zew.de

Prof. Dr. Robert Schwager (Univ. Göttingen and ZEW), Telephone: +49(0)551/39-7293, E-mail: rschwag@uni-goettingen.de

Dr Lothar Lammersen (ZEW), E-mail: lammersen@zew.de

Marc Bros de Puechredon (BAK Basel Economics), Telephone: +41(0)61/27997-25, E-mail: puechredon@bakbasel.com