Microsimulation Study of the German Transfer and Tax System

Tasks

Major changes in the German tax and transfer system have been pending since the Hartz reforms in the form of the citizen's income and the basic child benefit. In addition, the introduction or expansion of unconditional elements in the transfer system is repeatedly discussed in public. The existing transfer system already contains unconditional elements. One example is child benefit, which is paid to all parents regardless of income. However, child benefits are then offset against transfer payments or, for high incomes, against the child allowance. Tax-free allowances can also be interpreted like a basic income. Here, however, the value of the transfer increases with income: Low incomes do not receive a transfer as long as they do not pay income tax. Subsequently, the value of each allowance (basic allowance, income-related expenses allowance, savers' allowance, children's allowance, single-parent allowance, old-age relief allowance, etc.) increases with the marginal tax rate, so that households with the highest incomes receive the highest transfer. The first step of this study is to take stock of the existing allowances and their distributional effects. In a second step, the conversion of individual or all allowances (deductions from the tax base) into tax credits (deductions from tax liability) will be simulated with respect to revenue, distribution and labor supply effects. There are basically two possibilities: Valuation of the tax allowances with the initial tax rate (leading to additional revenue) or with the top tax rate (leading to lower revenue). In a third step, a (revenue-neutral) reform could be simulated that combines the second step with an increase in incentives for transfer recipients in order to increase the efficiency and fairness of the system.

Methods

The ifo microsimulation model allows us to estimate ex-ante how changes in the tax and transfer system affect public budgets – i.e. tax revenues, social security revenues and the payment of government transfers – individual work incentives and employment development as well as income distribution and numerous different household types.

Data and other source

For the study, the current SOEP wave before Corona influence and the modeling of the current legal status are used as the data basis.