Return of Additional Tax Revenues Is the Right Thing to Do, but Should Be Supported by Social Policies


ZEW Study on Tax Relief

The German government wants to relieve citizens financially, not least because of the increased bracket creep effect. Adjustments to income tax and child benefit and, most recently, the announcement that taxpayers will be able to deduct pension contributions in full as early as 2023 – and not only as of 2025 as originally planned – are intended to make more money available to households. A recent ZEW study now shows how the planned tax measures affect different incomes. It finds that high earners, who are usually more strongly affected by the bracket creep, benefit most from the planned relief – not only in absolute but also in relative terms.

The richest ten per cent save 691 euros per year through the proposed adjustments in income tax rates and child benefits, while for the bottom ten per cent the relief is only 19 euros. Overall, the distribution of these funds is as follows: About 30 per cent of the 10-billion-euro relief goes to the top ten per cent. The share going to the poorest ten per cent is negligible. The full tax deductibility of pension contributions will relieve the richest ten per cent by 180 euros per year from 2023, while the bottom ten per cent will receive only an extra three euros through this measure.

The picture is still similar when looking at the percentages: “The differences in the relief effect between the income strata are smaller in the relative view than in the absolute view, but higher income earners also benefit more strongly in relative terms,” says Professor Holger Stichnoth, head of the ZEW Research Group “Inequality and Public Policy”. The ZEW study shows a different result than the calculation of the Federal Ministry of Finance, according to which people with low incomes are relieved to a greater extent in percentage terms. These discrepancies result from a different approach: While the Federal Ministry of Finance compares the previous tax burden with the planned new tax burden in order to calculate the relief effect for households, the ZEW calculations are based on the percentage changes in disposable income.

“The stronger relief of upper incomes is unpopular in terms of distribution policy, but the compensation of the bracket creep is nevertheless necessary in times of high inflation, because it returns unplanned additional tax revenues to citizens. The equally necessary relief for lower income groups in the face of rising prices is different matter. It should not be financed from the additional revenues of the bracket creep, even if this seems tempting in the short term,” says Stichnoth.


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