Out of the low-income trap(!) – The ifo proposal for reforming the basic income support system

The ifo Institute has drawn up a proposal for reforming the basic income support system by improving employment incentives. Germany’s existing Hartz IV income guidelines prefer small jobs in which workers earn up to 100 euros a month. In addition, it is rarely worthwhile for them to work longer hours and increase their gross income. Furthermore, Hartz IV recipients are subject to implicit marginal tax rates of 80–100%. The ifo Institute’s reform concept proposes reducing the implicit marginal tax burden in the low-income sector to 60% for people who earn 630 euros per month or more. Improving the incentive structures would make it easier for those affected to achieve independence from benefits by themselves than they could under the current guidelines.