The Taxation of Spouses in Germany: The economic impact of different reform proposals

What is striking in Germany is that fiscal and social legislation contain contradictory provisions. As amended in 2008, the law’s position on alimony suggests that a marriage’s secondary earner can become path dependent if, following the logic of income splitting, they are not, or only marginally, gainfully employed during the marriage. Simulations show the economic impact of different reform models. Limiting the present arrangement, for example, by allowing current spouses only the restricted degree of joint taxation applicable to alimony payments or by introducing individual taxation with a transferable basic tax allowance would limit the splitting effect and therefore particularly penalise marriages where one partner works only part-time or not at all. The work incentives for second earners, and thus especially for women, could only be gradually increased by switching to alternative forms of taxation without accompanying tax relief. For radical improvements, further measures would be necessary, for example relating to the supply of day care centre places and to mini-jobs and free joint-membership of the statutory health insurance system.