Reform Plans of the Grand Coalition to Reduce Burden on Families

If the CDU/CSU and SPD agree to form a governing coalition and implement their reform plans in the areas of tax and family policy, this would primarily ease the financial burden on households with children. At the same time, it is above all the middle class who would benefit from the planned reforms. Low-income households, however, also stand to benefit from these plans, which would cost the state around 13.6 billion euros per year. With regard to the households’ voting preferences, the tax reductions would yield the highest savings among supporters of the green and the liberal party (FDP). SPD and CDU/CSU voters would benefit to a more or less equal extent from the tax relief.

These are the key findings of calculations conducted by researchers from the Centre for European Economic Research (ZEW), Mannheim, and the IZA – Institute of Labour Economics, Bonn. As part of the study, researchers considered the preliminary coalition paper of the CDU/CSU and the SPD, in which the parties agreed on a higher exemption limit for the solidarity surcharge; higher child benefits and allowances; lower unemployment insurance contributions; an equal distribution of health insurance contributions between employers and workers; a higher threshold for the assessment of social benefit contribution for workers in so-called midi-jobs; and the elimination of maximum income regulations for child supplements.

The researchers concluded that, if all these reforms plans are implemented, an average household would experience an increase in disposable income of around 408 euros per year. The amount of the tax relief for the individual households depends, however, on the type of household, the number of children and the income level.

While couples with children and single-parent families can expect an average increase in disposable income of 1,042 euros and 532 euros respectively, childless couples and single-person households would experience an increase of 395 euros and 183 euros, respectively. The number of children in one household also plays an important role with regard to tax savings. For households with four or more children, the tax reductions would result in an increase of 1,398 euros per year, whereas households with three children would save 1,221 euros, families with two children 1,044 euros, and households with one child 770 euros per year. For households with no children, researchers have calculated an increase in disposable income of 270 euros per year.

Reforms benefit middle- and high-income households in particular

According to the calculations conducted by ZEW and IZA, households with an annual gross income between 100,000 and 150,000 euros benefit the most from the reform plans. With regard to the households’ income level, it becomes apparent that the financial benefits are almost equally distributed between middle- and high-income households. Households with incomes of more than 150,000 euros would benefit less form the planned reductions.

The implementation of these tax and family policy reforms would cost around 13.6 billion euros per year, more than half of which (7.5 billion euros) are attributable to the higher exemption limit for the solidarity surcharge. However, the preliminary coalition paper includes measures that bring about an even higher tax relief regarding the solidarity surcharge (ten billion euros).

By comparing the expected reductions to the households’ voting preferences, the researchers came to the conclusion that households supporting the green party would experience on average an income increases of 577 euros per year. Those supporting the German liberal party would have an additional 527 euros per year at their disposal. They are closely followed by CDU/CSU supporters (398 euros per year), AfD voters (371 euros per year) and supporters of the SPD and the Left Party (369 and 356 euros per year, respectively).

“Marginal burden considerably higher among low-income earners”

“Due to the exemption limit of the solidarity surcharge, the marginal burden in some cases reaches a level of almost 60 per cent. For incomes that are above the contribution assessment ceiling of the pension and unemployment insurance, however, the marginal burden falls to approximately 50 per cent,” says Florian Buhlmann, a researcher in the ZEW Research Group “International Distribution and Redistribution”. “Low incomes are subject to a much higher marginal burden since additional income reduces transfer payments received from the state,” explains Buhlmann, “the new federal government would have to make adjustments in this regard. The plan to eliminate the maximum income regulation for child supplements is a first step in the right direction.”

Professor Holger Bonin, Research Director at IZA, goes on to explain: “The planned reform package is likely to benefit particularly the middle class. A general increase in child benefits is not a very efficient family-policy measure – allocating the majority of the budget to this policy area is therefore not a good idea. Furthermore, the plan to provide free nursery school places is yet another measure that particularly benefits high-income earners.” According to Bonin, using the solidarity surcharge as a distribution policy instrument is also a questionable measure: “Adapting the income tax rate would be far more effective.”

The calculations conducted by ZEW and IZA are based on the 2010 survey wave of FAST (Faktisch Anonymisierte Lohn- und Einkommensteuerstatistik) as well as data from the German Socio-Economic Panel (SOEP) from 2015.

For further information please contact:

Florian Buhlmann, Phone +49 (0)621/1235-234, E-mail florian.buhlmann@zew.de