Possible Reforms of Income Taxation after the 2021 Bundestag Elections

This paper examines the revenue, employment, and distributional effects of four possible income tax reforms after Germany’s 2021 federal election. The simulations show that these hypothetical reforms would relieve households’ income tax burden. Reforms that include the abolition of the solidarity surcharge would particularly benefit higher income brackets. Under these reforms, the amount for distribution would tend slightly toward redistribution in the direction of the high-income earners. With a reform in which only the basic tax-free allowance is raised, inequality would decrease slightly. Reform proposals would create positive incentives for gainful employment. However, an associated increase in tax revenue could compensate only partially for the reduction in government revenue triggered by a lower tax burden for a very large part of the population.