German Tax and Social Security Burden Decreasing since 1986

The burden on gross incomes in Germany from taxes, the solidarity surcharge, and social security contributions has decreased almost continuously since 1986, according to ifo Institute calculations. “Whether it makes sense to continue this trend toward lower income tax burdens is questionable. After all, Germany has decided to invest massively in climate change, digitalization, and education over the coming years,” says Andreas Peichl, Director of the ifo Center for Macroeconomics and Surveys.

According to the ifo Institute, the reduction is spread across all income groups. For example, a one-person household with a real gross income of EUR 50,000 (in 2015 terms) now carries an average burden of 39.8 percent for taxes and social security contributions; 35 years ago, the average tax rate was 43.0 percent. That means this sample household now has to pay EUR 1,600 less per year in taxes and social security contributions. “The most significant reduction over this long period was for top earners,” Peichl explains. They benefited particularly from the reduction in the top tax rate from 57 to 42 percent.

The 1990 reform primarily reduced the burden on middle incomes by eliminating what was known as the “middle-class bulge.” For low earners, the reduction in the minimum tax rate from 22 percent in 1986 to 14 percent today has had a positive effect.

The study also shows that the moderate increases in social security contributions during this period do almost nothing to counteract the trend. Nevertheless, they make the tax system less progressive by burdening low earners with a higher proportion of taxes than those on incomes above the contribution assessment ceilings. The study illustrates the development using eight different sample households.