Reform of Taxes and Allowances Could Increase German Employment by 400,000 Jobs

According to the ifo Institute, the strongest income growth would be for couples with children, depending on the assumptions made (+2 to +3 percent), as well as for single parents (+1.6 percent). “Families with children in particular would be better off in terms of their disposable household income under our proposal compared to the status quo,” Peichl says. The ifo proposal would also reduce disposable income inequality overall. 

The ifo Institute envisions a reform to family taxation: high tax-free child allowances and switching tax splitting for married couples to real splitting would help encourage the lower-earning spouse to take a job. In addition, government grants would be reduced less for low-income earners with additional earnings. This is intended to create incentives to make it worthwhile to work more, even for people with low incomes. Finally, the ifo proposal includes the complete abolition of the solidarity surcharge. At the same time, the top income tax and wealth tax rates as well as the basic tax-free allowance and the lump sums would be raised in order to limit tax revenue losses and distribute the tax relief evenly.