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Taxes on labour

Author

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  • Wolfgang Meister

Abstract

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.

Suggested Citation

  • Wolfgang Meister, 2005. "Taxes on labour," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 58(24), pages 06-17, December.
    • Handle: RePEc:ces:ifosdt:v:58:y:2005:i:24:p:06-17
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    References listed on IDEAS

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    1. repec:ces:ifosdt:v::y:2000:i::p:10-25 is not listed on IDEAS
    2. Willi Leibfritz & Erich Langmantel & Wolfgang Meister & Barbara Schaden & Ulrich Scholten & Martin Werding, 2000. "Evaluierung des Steuerreformvorschlags der CDU/CSU vor dem Hintergrund der Erfahrungen mit fundamentalen Steuerreformen im Ausland," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 53(19-20), pages 10-25, July.
    3. Hans-Werner Sinn, 2002. "The red tail light - The reasons for Germany's weak growth and the necessary reforms," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 55(23), pages 3-32, December.
    4. Hans-Werner Sinn & Willi Leibfritz & Alfons J. Weichenrieder, 1999. "ifo Vorschlag zur Steuerreform," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 52(18), pages 03-18, October.
    5. repec:ces:ifosdt:v::y:2002:i::p:03-52 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Stefanie Gäbler, 2015. "Gekommen, um zu bleiben – Fiskalische Effekte ausländischer Studierender in Deutschland," ifo Dresden berichtet, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 22(05), pages 32-41, October.
    2. Andreas Peichl & Nico Pestel & Sebastian Siegloch, 2013. "Ist Deutschland wirklich so progressiv? Einkommensumverteilung im europäischen Vergleich," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 82(1), pages 111-127.
    3. Hans-Werner Sinn & Christian Holzner & Wolfgang Meister & Wolfgang Ochel & Martin Werding, 2006. "Activating social welfare 2006 - the combi-wage model of the Ifo Institute," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 59(02), pages 06-27, January.
    4. Peichl, Andreas & Schaefer, T., 2008. "Wie progressiv ist Deutschland? Das stuer-und transfersystem im europaischen vergleich," EUROMOD Working Papers EM1/08, EUROMOD at the Institute for Social and Economic Research.

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    More about this item

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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