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Distribution and Public Finances

The national budgets of the federal government, the states, the municipalities and the social security funds have a volume of just under half of Germany's gross domestic product. After running deficits for decades, the state as a whole recently achieved surpluses before the Corona crisis. Thanks to low interest rates and rising revenues from taxes and social security contributions, Germany did not have to incur any new debt. However, the Corona crisis has again led to rising government spending, lower tax revenues and thus higher government debt overall, although the scope for government investment is limited by the debt brake. Germany currently has a debt level of more than two trillion euros.

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In addition to the openly disclosed debt, implicit debt lies dormant in the social system in the form of unfunded benefit commitments for pension, health and long-term care insurance. Germany currently spends around one-third of its economic output on social benefits, which already puts it in the lead among industrialized nations. Demographic change will place even greater demands on the social systems in the future.

The development of income and wealth inequality is the subject of much controversial debate in Germany. Although the inequality of disposable household incomes in Germany is higher today than it was at the beginning of the 1990s, it has not changed significantly since 2005. In an international comparison, it is low. For example, the top ten percent receive just over 30 percent of incomes. The wealthiest ten percent own around 60 percent of total assets. Consequently, wealth is distributed more unequally than disposable income. However, the upper class is not quite as aloof as these figures suggest: A large proportion of wealth is tied up in businesses that provide the livelihood for many millions of people in the form of jobs.

Due to technological progress, companies are increasingly looking for more highly qualified employees - with correspondingly higher salaries. At the same time, low-skilled workers face greater competition from workers from abroad. Because of these and other trends, income distribution in Germany - as in all industrialized countries - widened in the 1990s and up to the mid-2000s. Unlike most other countries, however, Germany was recently able to slow the income drift and fix it at the 2005 level. The good economic development and the unprecedented reduction in unemployment have improved the living situation of millions of people and stabilized income levels.

The state intervenes more strongly in income distribution in Germany than in many other countries, so inequality in Germany is low. As convoluted as the effects on redistribution are in detail, the result is clear: Those who earn more receive less state pay and pay higher taxes. Conversely, the less citizens earn, the more they receive from the state. The strong shoulders thus bear a heavier burden.

German Economic Institute (IW) German Economic Institute (IW)

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Should the State Pension Scheme Take Different Socio-demographic Backgrounds into Account?
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Should the State Pension Scheme Take Different Socio-demographic Backgrounds into Account?

While German law stipulates a standard retirement age for all members of the public pension scheme, empirical studies have shown that life expectancy is unevenly distributed within the population, varying according to income level, professional status, occupational health risks, and gender.

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Tax concessions in OECD countries
Martin Beznoska / Christian von Haldenwang / Ruth Maria Schüler IW-Report No. 34 13. June 2022

Tax concessions in OECD countries

The Global Tax Expenditures Database (https://gted.net/) collects national reports on tax expenditures for 101 countries for the period from 1990 to the present.

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Michael Hüther / Judith Niehues External Publication 8. June 2022

Perception and Reality: Inequality and Unemployment in Germany

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Read study
Should the State Pension Scheme Take Different Socio-demographic Backgrounds into Account?
IW-Trends No. 2 6. July 2022

Should the State Pension Scheme Take Different Socio-demographic Backgrounds into Account?

Florian Blank / Johannes Geyer, Peter Haan, Maximilian Schaller / Jochen Pimpertz / Reinhold Thiede / Martin Werding

While German law stipulates a standard retirement age for all members of the public pension scheme, empirical studies have shown that life expectancy is unevenly distributed within the population, varying according to income level, professional status, occupational health risks, and gender.

IW

Read study
Fiscal and Economic Effects of Local Austerity
External Publication 20. June 2022

Fiscal and Economic Effects of Local Austerity

Melinda Fremerey / Andreas Lichter / Max Löffler in CESifo Working Papers

We study the consequences of a large-scale austerity program targeting financially-constrained municipalities in Germany. For identification, we exploit the quasi-random assignment of treatment among equally-distressed municipalities using a difference-in-differences design.

IW

Read study
Tax concessions in OECD countries
IW-Report No. 34 13. June 2022

Tax concessions in OECD countries

Martin Beznoska / Christian von Haldenwang / Ruth Maria Schüler

The Global Tax Expenditures Database (https://gted.net/) collects national reports on tax expenditures for 101 countries for the period from 1990 to the present.

IW

Read study
Inequality and Unemployment in Germany
External Publication 8. June 2022

Perception and Reality: Inequality and Unemployment in Germany

Michael Hüther / Judith Niehues

Data for the time before the corona pandemic reveal a largely positive picture of the economic and social development in Germany. Most individuals perceived their own situation as very positive, but their views on society are rather pessimistic and overly critical.

IW

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