More Employment and More Tax Relief for Families: A Reform Proposal on Income Taxation

The article presents a reform proposal for the income tax and transfer system that is almost revenue-neutral for the government budget. It reduces tax disincentives to participate in the labor market and distributes the burden fairly, in particular by focusing more on children when it comes to tax benefits for marriage and family, leading to more winners than losers in all deciles. The middle class would see the largest income gains under this reform proposal. Central reform components are a reform of family taxation with high child tax allowances and the conversion of marital splitting into marital real splitting, an adjustment of transfer withdrawal rates to eliminate the low-income trap, and the abolition of the solidarity surcharge, with a simultaneous small increase in the top income tax and wealth tax rates as well as in the basic tax-free allowance and lump sums.