Party Tax Plans Vary Greatly over Relief for Private Households

Planned reforms of income tax and the “solidarity surcharge” in Germany differ wildly depending on which political camp they come from. By far the greatest variation is visible in the taxation of private households. Total tax relief based on the various parties’ tax plans could range from 1.5 billion to 34.6 billion euros, while the average disposable income of private households could rise from anywhere between 107 to 905 euros a year. In all of the suggested tax reform plans, the absolute tax reductions for households (in euros) for the most part increase with income. These are the principal findings of a joint study conducted by the Centre for European Economic Research (ZEW), Mannheim, and the IZA – Institute of Labor Economics, Bonn, on behalf of the German Federal Ministry for Economic Affairs and Energy.

Researchers involved in the study investigated the suggested reforms to income tax and the “solidarity surcharge” as laid out in the government programmes of both the Christian Democratic Union (CDU)/Christian Social Union (CSU) and the Social Democratic Party (SPD). Researchers also simulated the reforms suggested by the German Trade Union Confederation (DGB) and the Bavarian Ministry of Finance, which put forward the idea of a “Bavaria tariff”. The microsimulation model used by ZEW and IZA is based on the 2010 survey wave of FAST (Faktisch Anonymisierten Lohn- und Einkommensteuerstatistik) as well as data from the German Socio-Economic Panel for the year 2015.

In absolute terms, households with a taxable income of between 150,000 and 250,000 euros would see the greatest financial benefit from the reforms suggested by the CDU/CSU. Based on income, households bringing in between 100,000 to 150,000 euros in taxable income would experience the largest relative reduction in their tax burden. The suggested reforms from the SPD and the DGB would also see the upper middle classes benefit more than low earners. Under these plans, however, the greatest tax reductions would be experienced by households with a taxable income somewhere between 55,000 and 80,000 euros, or between 40,000 and 55,000 euros in terms of disposable income. Households bringing in a taxable income of more than 150,000 euros would, however, see a considerable loss in income. Households with more than 250,000 euros in annual taxable income would be 7,500 euros worse off under the SPD plan and 20,000 euros worse off under the DGB plan.

All party plans would lead to an expansion of the labour supply

The study also shows that total tax relief from the proposed reforms to income tax and the “solidarity surcharge” would amount to two billion euros under the DGB plan, 6.1 billion under the SPD plan and 21.2 billion under the CDU/CSU plan. The income tax component of the “Bavaria tariff”, meanwhile, would lead to a tax reduction of 8.2 billion euros. If the CDU/CSU’s plan to scrap the “solidarity surcharge” were implemented today, total tax relief would be even higher, at 22.6 billion euros (CSU plan) or 34.6 billion (CDU).

All of the suggested reforms would lead to an expansion of the labour supply, since the resulting tax relief would allow workers to hold on to a larger share of their additional earnings. Out of all the proposed reforms, the most strongly positive effects on the labour supply would result from the CDU’s plan (up to 400,000 full-time equivalents). When considered in relation to fiscal tax relief, the DGB plan comes out on top with 7.3 full-time equivalents per 100,000 euros, followed by the Bavaria tariff with 2.4 full-time equivalents and the SPD plan with 1.9.

Distribution effects of suggested reforms are not transparent enough

If these positive effects on the labour supply are met with corresponding demand, there will be resulting reciprocal financing effects. These effects could amount to around two billion euros under the SPD and DGB plans, or up to 4.5 billion euros if the Bavaria tariff is introduced. If the CDU/CSU plan, more specifically the plan put forward by the parties’ small business association (CDU/CSU-Mittelstandsvereinigung), is implemented, these effects could run to as much as 7 billion euros.

“A common complaint right now is that there are very few differences between the plans put forward by the established parties, but this isn’t the case when it comes to their ideas about fiscal policy. In their plans, the parties are still appealing to different income groups as they have always done,” comments Dr. Holger Stichnoth, acting head of the ZEW Research Group “International Distribution and Redistribution” and co-author of the study. According to Stichnoth, the distribution effects of the various plans are, however, not entirely clear to many Germans. An attempt to eliminate the “middle-class bulge” would not only benefit the middle class but high-income households as well. The SPD’s plan to scrap the “solidarity surcharge” for households with an income of less than 52,000 euros would also leave the wealthy better off.

Holger Bonin, Research Director at IZA, says: “If policy-makers want to reduce the burden on the middle class and low earners, adjusting the income tax scale or making changes to the solidarity surcharge is fairly ineffective. A reduction in value added tax would make a far greater difference to these target groups.” Bonin also warns against making large tax cuts that could greatly inhibit the government’s room to manoeuvre. “Even though tax reform is definitely necessary during this parliamentary term, the public purse should still be in good enough shape to make the investments in education and infrastructure that are so desperately needed.

About the study

The study “Ökonomische Bewertung verschiedener Reformoptionen im deutschen Steuer- und Transfersystem” (Economic Evaluation of Various Potential Reforms to the German Tax and Transfer System) was conducted by ZEW and IZA as part of a framework contract with the German Federal Ministry for Economic Affairs and Energy. Along with IZA, ZEW also cooperated with the economic research and business consultancy Prognos AG for the purposes of the study.

For further information please contact:

Dr. Holger Stichnoth, Phone +49 (0)621/1235-362, E-mail holger.stichnoth@zew.de