Fuest Proposes Reform to Germany’s Tax Splitting for Married Couples
Clemens Fuest, President of the ifo Institute, has proposed a reform to Germany’s policy of tax splitting for married couples. “From an economic point of view, marital splitting creates strong incentives for second earners, usually women, not to pursue gainful employment or, at best, to take on a part-time job – and instead to concentrate on household chores and raising children. A system shift to models such as real splitting could spur second earners into greater labor force participation. Transitional solutions could limit the tax burdens on existing marriages,” Fuest says.
Today’s concept of “family” is more diverse than the traditional division of labor between a man and a woman, with the man as the sole breadwinner. “Equality for women, a fundamental social concern, has a lot to do with gainful employment and economic independence,” Fuest says. “However, tax policy can be only one of several pillars for getting more women into the work force. A package of measures is needed to further expand childcare and greatly improve work-life balance,” Fuest explains.
In principle, what real splitting does is tax each spouse independently of the other. However, the first earner can transfer a certain amount to the second earner for tax purposes. Fuest believes this makes sense because spouses are obligated to support each other. The incentives for the second earner to work are not as limited under real splitting as under marital splitting. Nonetheless, with real splitting, the tax burden on the second earner is also positive from the first euro because the transferred income amount is already taxable. Therefore, the employment effects are positive, but ultimately marginal. Estimates put the number of additional full-time jobs at around 50,000.
Publication
Advantages and Disadvantages of a Reform of the Marital Splitting System
ifo Institut, München, 2021
ifo Viewpoint No. 227
