ZEW Assesses the Combined Effects of Various Reform Proposals
ResearchCalculations Made for the Newspaper DIE ZEIT
A number of reform proposals have recently been published, but their combined effects are not yet clear. An analysis by ZEW Mannheim for the weekly newspaper DIE ZEIT shows that the state will collect around 9.7 billion euros in additional revenue. For private households, this represents an additional burden of a similar magnitude, though this is concentrated amongst those on higher incomes.
DIE ZEIT has published a “reform calculator” which, based on the ZEW figures, illustrates the impact of the reforms on net income from 2028 onwards for employees covered by statutory health insurance. The data is broken down by income, marital status and number of children.
“By making the ZEW data available for the reform calculator, we are helping to provide transparency about the effects of the reforms to the debate,” says Professor Holger Stichnoth, head of the ZEW Research Group “Inequality and Public Policy”.
Higher earners pay more
The researchers have combined the proposed reforms to income tax, statutory health insurance, long-term care insurance and pension insurance, and examined the overall resulting effects.
“Taken together, the reforms we have examined will result in additional burdens, but these are concentrated on higher incomes. For low and middle incomes, at least, everything remains unchanged. Increased contributions for health, long-term care and pension insurance are partially offset by tax relief measures. The reforms will relieve the state budget by 9.7 billion euros,” says Stichnoth. “However, our calculations cannot take account of the bracket creep effect. It is not unlikely that the tax burden may also rise for lower incomes. In this case, the burden on higher earners would also increase slightly more than we have calculated.”
According to the calculations, an unmarried single earner with a gross annual income of around 50,000 euros will have around 48 euros less net income per year in 2028. If, on the other hand, the person were married and had a child aged under twelve and living in the household, they would have an additional 111 euros net per year at their disposal. Households with a gross annual income of more than 250,000 euros will face a higher burden of around 2,400 euros on average. The additional burden is also highest as a percentage of income in the top income bracket.
19,000 more full-time equivalents
“With the abolition of non-contributory co-insurance, there is no longer a risk of higher health insurance contributions when somebody takes up a job. The labour supply will increase by around 19,000 full-time equivalents as a result of the reform package as a whole,” says Stichnoth.
Microsimulation
The researchers quantify the effects of the reforms using the so-called “Evaluation Model for Integrated Tax and Transfer Policy Analyses” (ZEW-EviSTA). This microsimulation models the German tax and transfer system. The analysis examined the financial distributional effects, the impact on the national budget and changes in work incentives.
The current calculations are based on the coalition’s decisions and on existing draft legislation and reform proposals relating to tax law, pensions, long-term care and health insurance, insofar as these go beyond the regular adjustments already required by law. No account has been taken of the fact that higher pension contributions are matched by higher pension benefits. However, these benefits will only accrue in the future, and their exact levels are difficult to estimate.
