The Distribution of the Tax Burden in Germany

Whereas the upper decile of the household income distribution accounts for almost half of all income tax revenue, in the case of value-added tax the share is lower due to the proportional tax rate. Even here, however, at 18 per cent the top decile’s share of tax revenues is still disproportionate. While some 4.2 million tax-payers are subject to the top income tax rate of 42 per cent, 2.7 million employees pay no income tax at all due to their low earnings. For the latter value added tax represents the heaviest burden. These are the results of a microdata analysis simulating the two tax types in Germany and comparing them with private household income distribution. However, households with very high incomes are not completely captured by the data, meaning that their share of tax revenues might actually be even higher than that calculated here. Even bearing in mind the fundamental principle behind the tax system, that those with the broadest shoulders should bear the greatest burden, reforms are necessary. Largely irrespective of household type, middle income households pay around 40 per cent of their income in income tax, value added tax and national insurance contributions. Lowering income tax rates, especially for lower income levels, would not only have the advantage of relieving the individual tax burden but would also improve the incentives for taking up jobs subject to compulsory social insurance and extending working hours.