Press release -

Parties’ Income Tax Plans Create Jobs but Burden German Budget

The income tax reforms proposed by Germany’s political parties will lead to more employment, but will have different effects on government finances. This is according to a study by the ifo Institute published in the latest edition of ifo Schnelldienst. Employment growth is highest under the FDP’s plans, which would lead to the creation of 330,000 new jobs. The Left Party’s plans would create 229,000 new jobs, those of the CDU/CSU would create 100,000, the SPD’s 66,000 and the Greens’ 24,000.

“It’s true that the additional jobs will generate more tax revenue. But this won’t be enough to offset the shortfall in the government budget that the parties’ planned reforms will cause,” says Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys. Under the FDP’s tax plans, the state would collect EUR 60 billion less per year even after taking into account the refinancing effects. The Left Party’s reform plans would result in almost EUR 22 billion less tax revenue. The shortfall would be EUR 18 billion with the CDU/CSU, EUR 9 billion with the SPD, and EUR 2 billion with the Greens.

As for the distribution of income, the parties’ plans have very different effects. The tax plans of the Greens and the Left would reduce income inequality, due mainly to the higher tax rates for high earners, which would leave this income group worse off. This effect is greater under the Left’s plans than the Greens’ because of the higher tax burden on very high earners and millionaires.

The CDU/CSU and FDP would reduce the burden on high earners and thus increase income inequality. “Under the plans of the CDU/CSU and FDP, high earners benefit above all from the complete abolition of the solidarity surcharge,” says Maximilian Blömer, ifo researcher and co-author of the study. Income inequality would be greater under the FDP than the CDU/CSU. The SPD’s reform proposal would have a neutral effect on income inequality.

The study is based on the reform proposals on income tax and the solidarity surcharge as outlined by the political parties in their election platforms. It did not consider other proposals on social security contributions, benefits, or the minimum wage. All parties have confirmed to the ifo Institute that their election platforms are correctly represented in the modeling; only the CDU/CSU have not commented. The AfD’s platform could not be included in the study due to a lack of concrete proposals.

Publication (in German)

Article in Journal
Maximilian Joseph Blömer, Lilly Fischer, Manuel Pannier, Andreas Peichl
ifo Institut, München, 2021
ifo Schnelldienst, 2021, 74, Nr. 10, 16-25
Contact
Prof. Dr. Andreas Peichl

Prof. Dr. Andreas Peichl

Director of the ifo Center for Macroeconomics and Surveys
Tel
+49(0)89/9224-1225
Fax
+49(0)89/907795-1225
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Dr. Maximilian Joseph Blömer, ifo Zentrum für Makroökonomik und Befragungen

Dr. Maximilian Joseph Blömer

Economist
Tel
+49(0)89/9224-1220
Mail