Reform of the Income Tax: the Rate of the Federal State of Lower Saxony

Tasks

The present income tax rate is leading to rapidly rising marginal tax rates on low and medium sized incomes. Against this background, there are repeated calls to reduce the tax burden on low and medium income earners. This project shows various reform options to lower the tax burden on low and medium income earners and quantifies their impact on households and public budgets.

Methods

The taxation process is shown schematically via the ifo Income Tax Simulation Model and is simulated for future years. The various types of income, along with growth in gross wages and tax deductions, are primarily projected using the inflation rate. The starting point for observation of the burdening and disburdening effects accompanying the reform options is the year 2020. The tax increase and/or relief at the individual level is calculated as the difference between the income tax burden resulting from the 2020 rate (including the solidarity surcharge) and the tax burden arising from the respective reform options.

Data and other sources

Statistische Landesämter (Statistical Offices of the German States), 
Statistisches Bundesamt (Federal Statistical Office)

Results

This study investigates four reform options that lead to tax relief for low and medium-income earners, while moderately burdening higher income-earners. The solidarity surcharge is abolished. The minimum exempted income and the lowest marginal income tax rate remain unchanged in all scenarios. The upper limit of the second tax bracket is always increased to 58,000 euros, whereas the upper limit of the third tax bracket (the amount as of which the "wealth tax" has been applied to date) is dropped to 150,000 euros. The marginal tax rates at the second and third borders are increased to 45 and 49%, respectively. In reform option I, for example, the end of the first bracket is shifted from 14,000 euros to 25,000 euros and the marginal tax rate is raised from 24% to 30.5%. Taxpayers in the lower and middle income tax brackets are far better off. For childless (single) individuals the tax burden increases when their gross income exceeds 112,500 euros. Relative to their gross income, taxpayers in the seventh income decile benefit the most. The fiscal costs of this scenario amount to 10.7 billion euros. For reform option II, which completely removes the middle-class bulge, the losses in tax revenues, by contrast, would be 39.3 billion euros. Childless (single) taxpayers would only bear an additional burden if they earn more than around 160,000 euros in gross income. The maximum relative relief occurs in the eighth income decile, and the only tax increase occurs in the tenth decile.

Publication (in German)

Fuest, Clemens, Stefanie Gäbler, Björn Kauder, Luisa Lorenz and Martin Mosler, Reform der Einkommensteuer: Vorschläge für einen „Niedersachsen-Tarif“, ifo Forschungsberichte 82, ifo Institut, 2017 | PDF Download