Documentation for the Online Tool „Who Finances the State”: The Distribution of Taxes, Social Contributions and Transfer Income of Private Households

By using different data sets and methodologies, taxes, social security contributions and social benefits can be considered together and examined for their distributional effects. The results show which areas of income distribution finance government tasks and which benefit from redistribution.

While income tax has a progressive effect - i.e. the average burden on income increases with higher income - indirect taxes such as the value-added tax generally have a regressive effect, i.e. the lower the income the higher the average burden. These two types of taxes therefore have opposite effects. Social security contributions, which are in parts direct claims on later payments from the government (e.g. to the statutory pension insurance), have the highest burdening effect in the middle range of the income distribution.

On the other hand, there are public pensions and monetary social benefits, which are received by the private households. The pensions of the Statutory Pension Insurance Scheme are an important part of the total gross income of private households. While statutory pensions occur in all sections of the income distribution, their share of income is highest in the 3rd decile at almost 43 percent. Afterwards, the importance decreases again in the higher deciles. In contrast, pensions for civil servants tend to be found in the upper half of the distribution and have the highest share in the 9th decile. The unemployment benefit is distributed quite broadly with a focus in the middle deciles. In contrast, means-tested benefits such as the social welfare benefit (ALG II) and basic old-age provisions are important sources of income at the lower end of the distribution.

The results of the net consideration of taxes and social security contributions on the one hand, and received monetary social benefits, on the other hand, show that the "ability-to-pay" principle of the German tax and benefit system applies and redistribution between the households clearly takes place. On average, households in the lower half of the distribution receive higher payments from the government than they pay to it. With increasing income, households contribute more net to the financing of government tasks and the burden of the tax system remains progressive. Although indirect taxes have a regressive effect in relation to income, they are implicitly borne by the government for recipients of social benefits. Wage earners at the lower end of the income distribution do not always exercise their benefit entitlements (e.g. housing benefit). An increase in the take-up of benefit entitlements could also provide relief for these households.