As in many other industrialised nations there is a trend in Germany towards greater income inequality. However, state intervention in income distribution is so extensive that there can be no talk of German society drifting apart.

In contrast to market-driven gross incomes, the spread of net incomes has remained almost constant in recent decades. On the one hand, the state pays out welfare benefits such as child benefit, pensions, unemployment benefit and social assistance. On the other, it collects tax and social insurance contributions – the higher the income, the more the taxman takes. Thus the top ten percent of earners shoulder more than half the burden of income tax. The bottom 20% pay virtually no income tax but draw the bulk of state subsidies.

However, increasing redistribution has an undesirable side-effect. Those with a will to work are hardly going to exert themselves if the state then robs them of their just wage. Only when hard work and superior knowledge are rewarded is there an incentive to invest in one’s own and one’s children’s education. In the end, even those with low incomes benefit when the will to work is sustained. In a growing economy the lot of the lowest earners improves even when their relative share shrinks. However, stifle motivation and the whole increase in prosperity is smaller. Those with low incomes then receive less than before although their share increases.

Judith Niehues

Dr. Judith Niehues

Head of the Research Group Microdata and Method Development

Tel+49 221 4981-768

Mailniehues@iwkoeln.de

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Christoph Schröder

Christoph Schröder

Senior Researcher für Einkommenspolitik, Arbeitszeiten und -kosten

Tel+49 221 4981-773

Mailschroeder.christoph@iwkoeln.de

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Maximilian Stockhausen

Dr. Maximilian Stockhausen

Economist for Income and Wealth Distribution

Tel+49 221 4981-862

Mailstockhausen@iwkoeln.de

@StockhausenEcon

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