## WEALTH INEQUALITY AND PRIVATE SAVINGS IN GERMANY — Executive Summary and Key Findings

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### Executive summary and core conclusion
- Core question: Does the large current account surplus in Germany reflect export-driven income gains that are evenly shared among the population?
- Main conclusion: Evidence strongly suggests this is not the case; German business wealth concentration plays an important role.
- Mechanism (high-level):
  - High corporate savings and underlying profits largely reflect capital income accruing to wealthy households and increasingly retained in closely-held firms.
  - Buildup of external imbalance accompanied by widening top income inequality, rising private savings and compressed consumption rates.
- Timeline and macro facts:
  - Aggregate saving rate and current account (CA) balance began to improve steadily starting in the early 2000s.
  - CA balance reached a peak of 8.5 percent of GDP in 2015.
  - NIIP boosted to around 61 percent of GDP at present (as reported).
  - Correlation between the CA and top income share is 0.95 (chart referenced).

### Mechanism illustration and distributional pathway
- Stylized pathway (as described in the Mechanism Illustration/Figure 1):
  - Industrial Profits ↑ → GVC /Export expansion → Wage growth ↓ → Income ↓ in bottom – high MPC; Income ↑ in top – high MPS/low MPC → Consumption ↓ → Saving ↑ → CA surplus ↑ → Saving concentration at the top → Wealth inequality ↑ → Income inequality ↑

### Stylized facts on wealth levels and concentration
- Median household net wealth in Germany: 61 thousand Euro.
- Euro area median household net wealth: 100 thousand Euro.
- Aggregate household financial net worth (excluding land, dwellings and other real assets): over 4 Trillion Euro; 95 thousand Euro per household (as of 2017).
- Total (financial and real) net worth estimated at 10 Trillion Euro; over 235 thousand Euro per household.
- Top 1 percent wealthiest households own 24 percent of total national net wealth in Germany (as of 2014 or latest available).
- Supplemental evidence: household surveys under-sample the richest; supplementing with rich lists increases the top 1 percent wealth share in Germany to 33 percent (highest in Europe).
- Private business wealth:
  - Around 60 percent of corporate net worth and profits in Germany are generated by privately-held firms.
  - Among publicly-listed firms, 65 percent are controlled by a family (directly via ≥20 percent stock ownership or via cross-holdings).
  - The largest controlling shareholder holds an average of 54.5 percent of voting rights in a German publicly listed firm.
  - The top 10 percent wealthiest households own around 60 percent of aggregate net wealth; 40 percent of this wealth is in private business ownership.
  - Private business wealth accounts for 25 percent of overall national wealth and 95 percent of private business wealth is owned by the top 10 percent wealthiest households.

### Income, consumption, and aggregate accounting patterns
- Mirror image: Rising NFC gross saving (retained earnings) coincided with a decline in household disposable income and consumption as a share of GDP.
- Aggregate changes over 2005–2017:
  - Household disposable income to GDP ratio declined by around 6 percentage points.
  - Lower quartile experienced a relative loss of 10 percentage points of GDP.
  - Median (50th percentile) lost 6 percentage points.
  - Top 1 percent saw disposable income to GDP ratio rise by 8 percentage points.
- Drivers of aggregate trends:
  - Increase in NFC gross saving since the early 2000s driven by rising corporate profits and declining dividend payout rates.
  - Corporate tax reforms in 2001 and 2008 favored retained earnings over dividend distribution and new equity issuance.
  - The 2008 corporate tax reform reduced the effective marginal tax rate (EMTR) on retained earnings from 38.6% to 29.8% and introduced a 25% withholding tax on dividends.
  - Household deposit interest rates declined by 2–4 percentage points between end-2008 and 2018.
- Distributional impact:
  - Lower- and median-income households bore most of the decline in disposable income share; high MPC at lower incomes implies declines in their incomes strongly reduce aggregate consumption.
  - From 2005 onward, transfer retrenchment and interest income reduction contributed most to the steepest decline in household disposable income to GDP; dividend and other property income ratios began declining in 2010 and stabilized in 2015.

### Empirical findings: corporate saving/profits and income inequality
- Panel evidence (unbalanced panel of 27 countries, broadly 1995–2015):
  - NFC gross saving rate constructed from sectoral national accounts; income inequality indices from WID.
  - A 1 percentage point increase in NFC saving rate is associated with a 0.3–0.4 percentage point increase in the income share of the top 10 percent.
  - Variation in corporate saving over time can explain 20 percent of the long-run change in income inequality in the sample.
- Table 1 (high-level):
  - NFC gross saving rate coefficients reported across specifications: 0.422***, 0.254***, 0.167***, 0.115*, 0.207***, 0.281* (t-statistics and sample details in table).
  - Dependent variable: Top income share (10 percent).

### Interaction: corporate profits/savings and wealth inequality
- Hypothesis: Given concentrated corporate ownership, increases in corporate profits/savings yield larger increases in income inequality where wealth concentration is higher.
- Empirical interaction results (selected from Table 2):
  - Profit Change main coefficients (examples): -0.639***, -0.581**, -0.930*, -0.778**, -0.850***, -5.714***.
  - Profit Change * Wealth Inequality interaction coefficients (examples): 0.0125***, 0.0118**, 0.0190*, 0.0149**, 0.0165***, 0.109***.
  - NFC Saving Change -2.554***; NFC Saving Change * Wealth Inequality 0.0488***.
  - Model statistics reported include N ranges (e.g., 273, 64, 164, 272, 4) and R2 values (e.g., 0.201, 0.246, 0.293, 0.190, 0.315, 0.988, 0.990).
- Interpretation:
  - For countries with low wealth inequality (below 40th percentile), higher corporate profits are associated with lower income inequality.
  - For countries with higher wealth inequality, increases in corporate profits are associated with higher income inequality; effect size grows with wealth concentration.
  - Regression results imply the rise in corporate saving, coupled with the degree of wealth inequality, can explain about half of the rise in top income inequality in Germany over 2000–2015.

### Corporate saving and aggregate private saving (Table 3 summary)
- Interaction estimates linking NFC Saving Change with overall private saving:
  - NFC Saving Change * Top wealth share: 0.0113*** (t = 10.68), repeated across specifications with similar significance.
  - NFC Saving Change * Gini coef.: 0.920*** (t = 9.60) and 0.907*** (t = 6.48).
  - Top wealth share main effects: 0.0547** (t = 2.45); 0.0430 (t = 1.64).
  - Gini main effect example: 7.390 (t = 1.55).
  - Model N: 110, 71, 81; R2: 0.562, 0.564, 0.483, 0.585, 0.575, 0.543.
- Interpretation:
  - With higher wealth inequality, overall private saving rates are more closely linked with corporate savings.
  - Positive and strongly significant interaction terms support the view that part of the change in corporate saving is disguised household saving when wealth is highly concentrated.

### Micro evidence on business owners and wealth concentration
- Wealth/income profiles and business ownership:
  - Business owners with controlling stakes accumulate more wealth relative to incomes; highest implied saving rates and saving differentials occur toward the top of the income distribution in Germany.
  - One third of German households do not save (survey evidence cited).
  - Späth and Schmid (2016) estimate that 54-65 percent of aggregate saving is carried out by the top 10 percent wealthiest households in Germany.
  - Wealth-to-income profile estimation (Appendix): Business owner coefficients show large positive and significant effects (e.g., Business owner 1.345*** (DE); Business owner 1.889*** (EA excl. DE)). Business owner interactions with top quintiles show larger coefficients for higher quintiles.

### Feedback loops and longer-run macro implications
- Self-reinforcing dynamics:
  - Richer households have higher saving rates, so top-biased income trends (e.g., higher corporate profits) lead to higher saving rates by wealthy households and over time to more wealth accumulation at the top.
  - The interaction between wealth inequality and private saving is mutually reinforcing.
- Cross-country evidence:
  - Variation in private saving evolution over the past 20 years explains over 23 percent of the current cross-sectional variation in current wealth inequality across 27 countries in the sample.
- Macro consequences:
  - Wealth inequality shapes macroeconomic adjustment to shocks and secular trends, illustrated by German aggregate private saving and current account balance response to rising corporate profitability.

### Taxation, inheritance, property valuation and distributional implications
- Property and inheritance taxation:
  - Revenues from property taxes (real property, inheritance and other property taxes) are only 1 percent of GDP.
  - Taxes on real property are only 0.4 percent of GDP.
  - Average inheritance flow rose from 4 percent in 1980 to over 10 percent of national income annually in 2010.
  - The inheritance tax reform of 2009 greatly increased exemptions for intra-family business transmission; regime primarily benefits the wealthiest (who can claim exemption of corporate assets).
- Valuation issue:
  - Last comprehensive updates of property values occurred in 1935 and 1964 (only West Germany), producing under-valuation of real estate that disproportionately benefits the wealthy given higher home ownership rates and recent house price appreciation.

### Policy-relevant observations and suggested structural reforms
- Key policy-relevant observations:
  - Trends in increasing corporate profits and gross savings have widened top income inequality because corporations are typically owned by households at the top of the wealth distribution.
  - Concentration of privately-held and publicly-listed firm ownership in industrial dynasties and institutional investors limits broad equity access.
  - Low average rate of home and equity ownership leads household assets to be undiversified; bulk of savings for households below the top are in saving accounts bearing low deposit rates.
- Structural and policy levers noted:
  - Reduce fixed costs for IPOs to lower barriers to public listings, enhance equity access, and reduce wealth concentration (Peter, 2019 referenced).
  - Expand venture capital financing and exit opportunities; reduce cost of equity issuance to promote business dynamism and broader sharing of productivity gains.
  - Revisit family business asset exemption in inheritance and gift tax to address entrenchment of wealth inequality and inequality of opportunity.
  - Consider tax design that reduces incentives for retaining earnings when distribution would broaden ownership (noted in descriptions of past corporate tax reforms that encouraged retention).
  - Increase property tax revenue base and update property valuations to reflect current values to reduce under-valuation bias that favors wealthier households.

### Related tax policy analysis (selected highlights from TAX PRESSURES AND REFORM OPTIONS)
- German CIT structure and rates:
  - Federal corporate income tax (FCIT): 15 percent.
  - Local business tax (LBT): rate averages another 14 percent, with a statutory minimum of 7 percent.
  - Solidarity surcharge: 5.5 percent.
  - Combined rate roughly 30 percent, on average.
  - LBT made up 78 percent of municipalities’ self-raised revenues and 41 percent of municipalities’ total revenues (2018).
- International profit shifting indicators:
  - Literature estimates of profit shifting for Germany: Clausing (2016) and Tørsløv, Wier, and Zucman (2018) estimate revenue loss of 28 percent of German CIT revenues in 2012 and 2015, respectively.
- Reform options and considerations:
  - R&D-targeted tax measures recommended over patent boxes; proposed cap on R&D tax credits of €2 million should be increased or eliminated.
  - Accelerated depreciation and full expensing examples cited as effective tools to lower the user cost of capital.
  - Anti-avoidance reforms: assess CFC threshold (currently 25 percent) and interaction with foreign tax credits and LBT; consider reducing threshold to 15 or 20 percent.
  - Destination-based cash-flow taxes (DBCFT): Germany likely to lose revenue from a DBCFT in recent years as trade surplus increased; unilateral adoption abroad could have severe repercussions.
  - CCCTB and residual profit allocation (RPA) discussed as EU/formulary options; potential German CIT base impacts reported (e.g., European Commission estimate: German CIT revenues could decline by 0.24 percent of GDP under CCCTB).
- Labor tax and household taxation reforms:
  - PIT thresholds and marginal rates: subsistence level €9,168 untaxed; marginal rate rises from 14 to 42 between €9,168 and €55,960; flat 42 percent above €55,960; step rise to 45 percent at €265,326.
  - Joint assessment increases marginal tax on secondary earners; reforms evaluated include real splitting, transfer of unused allowance, additional married couples’ allowance, and mission proposals (tax allowance for couples and tax credit for couples).
  - Social security contributions total 38.75 percent (Pension 18.6 percent; Unemployment 2.5 percent; Health 14.6 percent; Long-term care 3.05 percent). Upper earnings limits: €80,400 for pensions and unemployment; €54,450 for health and long-term care.
  - Marginal tax wedge peaks at around 64 percent for taxable incomes just below €54,450.
  - Mini job and midi job regimes described with thresholds and contribution differences (mini jobs: up to €450 per month; midi jobs: €450 to €1300 (€850 until July 1, 2019)).

*Source — IMF staff analysis in "WEALTH INEQUALITY AND PRIVATE SAVINGS IN GERMANY" (excerpted chapter from 1deuea2019002).*

### References ____________________________________________________________________________________ 22

### References ____________________________________________________________________________________ 22

### FIGURES
- Mechanism Illustration (Figure 1) — page 4
- Median Net Wealth (Figure 2) — page 5
- Wealth Share of Top 1 Percent (Figure 3) — page 5
- Evolution in Disposable Income Inequality (Figure 4) — page 6
- Drivers of Wealth Inequality (Figure 5) — page 7
- Role of Private Business Wealth (Figure 6) — page 9
- Property Tax Revenues (Figure 7) — page 10
- Contribution to Cumulative Change in Household Disposable Income to GDP Ratio (Figure 8) — page 11
- Dispersion of Real Disposable Income (Figure 9) — page 12
- Correlation Between Long -run Change in Income Inequality and Corporate Savings (Figure 10) — page 14
- Wealth/Income Ratios Across Income Distribution (Figure 11) — page 18
- Correlation Between Long-run Change in Private Saving and Wealth Inequality (Figure 12) — page 19

### CONTENTS (Excerpt)
- Date: June 21, 2019
- Country focus: GERMANY
- Publication: INTERNATIONAL MONETARY FUND
- APPENDIX I. Wealth-to-Income Profile Estimation — page 21

### TABLES
- Corporate Saving and Top Income Shares (Table 1) — page 13
- Interaction with Wealth Inequality (Table 2) — page 15
- Corporate savings and aggregate private savings (Table 3) — page 17

### APPENDIX (Excerpt)
- TAX PRESSURES AND REFORMS OPTIONS — starting page 25
  - A. Introduction — page 25
  - B. Analysis of Issues in Germany — page 26
  - C. Reform Options for Germany — page 32
  - D. Reactions to International Developments — page 33
  - E. Labor Taxes — page 37
- Figures in Appendix:
  - Average CIT Rate (Figure 1) — page 27
  - Effective Average Tax Rates, 2017 (percent) (Figure 2) — page 27
  - CIT Revenue, 2017 (Figure 3) — page 28
  - Gross Operating Surplus (OS) of Foreign Controlled Affiliates (Figure 4) — page 29
  - Differences Between Revenues from Taxing Routine Returns and CIT Revenues (Figure 5) — page 36
  - CIT versus DBCFT Revenue (Figure 6) — page 37
  - Marginal Tax Rates (Figure 7) — page 38
  - PIT (only) Rates for Married People Whose Spouse Earns €40,000 (Figure 8) — page 40
  - The Marginal and Average Tax Rates for Individuals Including Social Contributions (Figure 9) — page 41
  - Marginal Tax Wedges (Figure 10) — page 42
- Table: German FDI Pattern (Table 1) — page 28
- APPENDIX I. Additional Table and Figures — page 44

### WEALTH INEQUALITY AND PRIVATE SAVINGS IN GERMANY — Executive Summary and Key Findings
- Core question: Does the large current account surplus in Germany reflect export-driven income gains that are evenly shared among the population?
- Main conclusion: Evidence strongly suggests this is not the case; German business wealth concentration plays an important role.
- Mechanism described:
  - High corporate savings and underlying profits largely reflect capital income accruing to wealthy households and increasingly retained in closely-held firms.
  - Buildup of external imbalance accompanied by widening top income inequality, rising private savings and compressed consumption rates.
- Timeline and macro facts:
  - Germany increased its current account surplus and net foreign asset position following the Euro adoption.
  - Aggregate saving rate and current account (CA) balance began to improve steadily starting in the early 2000s.
  - CA balance reached a peak of 8.5 percent of GDP in 2015.
  - NIIP boosted to around 61 percent of GDP at present (as reported).
- Correlation:
  - Correlation between the CA and top income share is 0.95 (chart referenced).
- Drivers:
  - Rise in non-financial corporate (NFC) sector’s gross and net saving rate over the last two decades.
  - Initial surge driven by rising profits on the back of wage restraint and falling labor shares.
  - Since 2008, lower dividend payout rates also contributed.
  - Growing corporate profits associated with globalization and wage restraint accrued mainly to households at the top of the wealth distribution where business ownership is concentrated.
- Distributional effect pathway (Figure 1 Mechanism Illustration):
  - Industrial Profits ↑ → GVC /Export expansion → Wage growth ↓ → Income ↓ in bottom – high MPC; Income ↑ in top – high MPS/low MPC → Consumption ↓ → Saving ↑ → CA surplus ↑ → Saving concentration at the top → Wealth inequality ↑ → Income inequality ↑
- Stylized facts on wealth levels and concentration:
  - Median household net wealth in Germany: 61 thousand Euro (figure referenced).
  - Euro area median household net wealth: 100 thousand Euro.
  - Aggregate household financial net worth (excluding land, dwellings and other real assets) stood at over 4 Trillion Euro or 95 thousand Euro per household as of 2017.
  - Total (financial and real) net worth estimated at 10 Trillion Euro, or over 235 thousand Euro per household.
  - Top 1 percent wealthiest households own 24 percent of total national net wealth in Germany (as of 2014 or latest available).
- International comparison implications:
  - Despite a large national stock of wealth, median household wealth is low, implying concentration of wealth in a small segment of the population.
  - Wealth inequality in Germany is among the highest in Europe by several measures (top 1 percent share, net wealth Gini coefficient, top 10 percent wealth share).

### B. Wealth Inequality in Germany: Stylized Facts (Selected Data Points)
- Median household net wealth: 61 thousand Euro.
- Euro area median household net wealth: 100 thousand Euro.
- Aggregate household financial net worth (excluding certain real assets): over 4 Trillion Euro; 95 thousand Euro per household (as of 2017).
- Total net worth (financial and real): 10 Trillion Euro; over 235 thousand Euro per household.
- Top 1 percent wealth share in Germany: 24 percent (as of 2014 or latest available).

*Prepared by Mai Chi Dao (EUR); material excerpted from the IMF country chapter on Germany.*

### 5.      Income inequality in Germany may be less severe than in some other major advanced

### 5.      Income inequality in Germany may be less severe than in some other major advanced

### Evolution of income inequality (post-reunification and recent decades)
- Income inequality in Germany is less than in UK, US, Japan, Korea, but its increase in recent decades has been steep in both gross and disposable income terms, as redistribution has overall weakened while market incomes diverged.
- Dynamics over time:
  - 1999–2005: Widening inequality driven by falling incomes at the bottom of the distribution due to high unemployment and declining union power.
  - Mid-2000s: Labor market strengthened; bottom incomes stabilized and Gini coefficient was largely stable, but top income inequality rose sharply as rising corporate profits and capital incomes disproportionately accrued to the wealthy.
  - From 2009 onward: Income inequality measured by standard metrics appears stable or only moderately rising; however, corporate retained earnings rose most sharply in this period and are not fully reflected in the income tax base, so measured top income shares understate true top incomes.
- Note: Properly attributing retained earnings to ultimate shareholders would likely increase the top income share, particularly after 2009.

- Data note: Household surveys under-sample the richest households; supplementing with rich lists increases the top 1 percent wealth share in Germany to 33 percent (highest in Europe).

### Wealth, housing, and private business ownership
- Wealth and income inequality are closely linked; income/savings is a key source for wealth accumulation.
- Studies show wealth inequality in Germany has increased since the early 2000s; between 2010 and 2017 the interquartile range of net wealth in Germany increased by 30 percent (Bundesbank Monthly Report April 2019).
- Private home ownership:
  - Private home ownership is very low in Germany, the lowest among Euro area countries.
  - Home ownership is particularly low among households in the low-middle segment of the income distribution; high-income households show less cross-country variation.
  - Recent house price appreciation has not broadly benefited the population; higher rents have strained housing affordability for lower-income households.
- Corporate ownership and equity access:
  - Around 60 percent of corporate net worth and profits in Germany are generated by privately-held firms; stock market capitalization is very low relative to GDP.
  - Among publicly-listed firms, 65 percent are controlled by a family (directly via ≥20 percent stock ownership or via cross-holdings).
  - The largest controlling shareholder holds an average of 54.5 percent of voting rights in a German publicly listed firm, compared with 20–25 percent in the UK and 31 percent in Sweden (Faccio and Lang, 2002).
  - Private business wealth is highly concentrated: the top 10 percent wealthiest households own around 60 percent of aggregate net wealth; 40 percent of this wealth is in private business ownership.
  - Private business wealth accounts for 25 percent of overall national wealth and 95 percent of private business wealth is owned by the top 10 percent wealthiest households.
- Implication: Rise in corporate profits, corporate saving, and appreciating equity valuations since the early 2000s mostly accrued to the wealthiest households via dividends or equity valuation gains, boosting top income and wealth shares; lower-decile households lost out due to wage restraint that enabled rising corporate profits.

### Taxation of property and inheritance
- Property taxation in Germany is low relative to peers:
  - Revenues from property taxes (real property, inheritance and other property taxes) are only 1 percent of GDP.
  - Taxes on real property are only 0.4 percent of GDP.
- Trends and reforms:
  - Declining path of property tax revenue reflects reductions in marginal tax rates in the 1990s and the inheritance tax reform of 2009, which greatly increased exemptions for intra-family business transmission.
  - Average inheritance flow rose from 4 percent in 1980 to over 10 percent of national income annually in 2010, largely reflecting inheritances and inter-vivos transfers of wealthy families.
- Distributional effect: The inheritance tax regime primarily benefits the wealthiest (who can claim exemption of corporate assets); average families face higher burdens given relatively low personal exemptions and substantial marginal rates — thus it is regressive.
- Valuation issue: Last comprehensive updates of property values occurred in 1935 and 1964 (only West Germany), producing under-valuation of real estate, which disproportionately benefits the wealthy due to higher home ownership rates and recent house price appreciation.

### Implications for household disposable income and consumption
- Mirror image: Rising NFC (nonfinancial corporation) gross saving (retained earnings) coincided with a decline in household disposable income and consumption as a share of GDP.
- Drivers:
  - Increase in NFC gross saving since the early 2000s driven by rising corporate profits and declining dividend payout rates.
  - Higher profitability supported by wage restraint/lower labor income shares and declining interest payments on debt.
  - Strong labor market after mid-2000s aided recovery in labor income share starting in 2008; but decline in unemployment and welfare retrenchment following Hartz IV reforms reduced net benefits since 2005, offsetting modest aggregate labor income gains.
- Aggregate changes:
  - Over 2005–2017, household disposable income to GDP ratio declined by around 6 percentage points.
  - Contribution breakdown (cumulative since 1991 shown in figure): Self-employment income, labor income, net interest income, distributed income of corporations, other investment income, transfers (net of taxes) — collectively show disposable income decline.
- Tax and interest rate effects:
  - Corporate tax reforms in 2001 and 2008 favored retained earnings over dividend distribution and new equity issuance, reducing payout shares.
  - The 2008 corporate tax reform reduced the effective marginal tax rate (EMTR) on retained earnings from 38.6% to 29.8% and introduced a 25% withholding tax on dividends; the top income tax rate affecting dividends of unincorporated firms was also raised, widening the tax differential between retained and distributed income.
  - Household deposit interest rates declined by 2–4 percentage points between end-2008 and 2018.
  - A large share of total assets of lower-middle income German households is held as financial assets (44 percent in Germany compared to 13.5 percent elsewhere in the Euro area), with around half of those assets in sight deposits and savings accounts subject to declining interest rates.
- Distributional impact:
  - Lower- and median-income households bore most of the decline in disposable income share; because their propensity to consume is high (close to one), this led to a decline in the aggregate consumption to GDP ratio.
  - From 2005 onward, transfer retrenchment and interest income reduction contributed most to the steepest decline in household disposable income to GDP; dividend and other property income ratios began declining in 2010 and stabilized in 2015.
  - Aggregate vs distributional changes (cumulative since 2005):
    - Aggregate disposable income to GDP ratio declined by around 6 percentage points.
    - Lower quartile experienced a relative loss of 10 percentage points of GDP.
    - Median (50th percentile) lost 6 percentage points.
    - Top 1 percent saw disposable income to GDP ratio rise by 8 percentage points.
  - Lower-income households experienced absolute erosion or stagnation of real purchasing power while top incomes increased.
  - Shifts of income toward top (low propensity to consume) away from median/bottom (high propensity to consume) explain declining aggregate consumption rate and contribute to the current account surplus.

### NFC gross saving, corporate profits, and income inequality — empirical testing
- Hypothesis: Rising NFC gross saving (driven by profits) is associated with rising income inequality over the medium–long term, enabled by skewed wealth distribution.
- Data and method:
  - Constructed an unbalanced panel of 27 countries (advanced and emerging) broadly from 1995–2015.
  - Computed NFC saving rate (in percent of GDP) from sectoral national accounts.
  - Collected income inequality indices from the World Inequality Database (WID).
  - Estimated panel regressions including country fixed effects and time fixed effects in alternative specifications; also regressed 5-, 7-, and 10-year changes.
- Main empirical finding:
  - A 1 percentage point increase in NFC saving rate is associated with a 0.3–0.4 percentage point increase in the income share of the top 10 percent (highest-income individuals).
  - The relationship is statistically and economically significant across specifications and holds in long-run changes (5-, 7-, 10-year regressions).
  - Variation in corporate saving over time can explain 20 percent of the long-run change in income inequality in the sample.
- Table 1 (summary of estimates):
  - NFC gross saving rate coefficients reported: 0.422***, 0.254***, 0.167***, 0.115*, 0.207***, 0.281* (t-statistics in parentheses; number of observations and R2 varying by specification).
  - Dependent variable in these regressions: Top income share (10 percent).

_Italic: Source — IMF staff analysis in "5. Income inequality in Germany may be less severe than in some other major advanced" (PDF chapter). _

### 16.      NFC profits interact strongly with wealth inequality in widening the income

### 16.      NFC profits interact strongly with wealth inequality in widening the income distribution

### Interaction between corporate profits/savings and wealth inequality
- Hypothesis: If unequal wealth distribution allows higher corporate profits to disproportionately benefit high-income households who own the corporations, then a given increase in profits should give rise to a stronger increase in income inequality if wealth concentration is higher.
- Empirical specification tests interaction between change in corporate profits (∆NFC profit) and country-specific wealth inequality measured by the top 10 percent wealth share.
- Expected sign: coefficient on the interaction term (∆NFC profit * wealth inequality) should be positive.

### Empirical results (summary of Table 2)
- Profit Change coefficients (selected columns):
  - Profit Change -0.639*** (t = -3.43)
  - Profit Change -0.581** (t = -2.16)
  - Profit Change -0.930* (t = -1.74)
  - Profit Change -0.778** (t = -2.18)
  - Profit Change -0.850*** (t = -2.64)
  - Profit Change -5.714*** (t = -16.01)
- Profit Change*Wealth Inequality interaction coefficients:
  - 0.0125*** (t = 3.31)
  - 0.0118** (t = 2.30)
  - 0.0190* (t = 1.82)
  - 0.0149** (t = 1.99)
  - 0.0165*** (t = 2.70)
  - 0.109*** (t = 16.80)
- Wealth Inequality main effects:
  - 0.000202** (t = 2.12)
  - 0.000343* (t = 1.80)
- NFC Saving Change and interaction (selected):
  - NFC Saving Change -2.554*** (t = -12.76)
  - NFC Saving Change*Wealth Inequality 0.0488*** (t = 14.44)
- Model details (selected):
  - N ranges reported: 273, 273, 64, 164, 164, 272, 4 (as in table layout)
  - R2 reported across columns: 0.201, 0.246, 0.293, 0.190, 0.315, 0.988, 0.990
  - Dependent variable: Change in Income Inequality; specifications include 5-year change, 10-year change, overlapping and non-overlapping changes; Country and Time fixed effects used as indicated.

- Interpretation:
  - Results are consistent with hypothesis: higher corporate profits are associated with lower income inequality only for countries with low wealth inequality (below the 40 percentile of the sample).
  - For higher levels of wealth inequality, an increase in corporate profits is associated with higher income inequality over time, with the increase being larger if wealth inequality is higher.
  - Similar results hold when interacting wealth inequality with corporate saving (instead of profits).

- Quantitative implication for Germany:
  - The regression results imply that the rise in corporate saving, coupled with the degree of wealth inequality, can explain about half of the rise in top income inequality in Germany over the period 2000–2015.

### The blurred boundary between household and corporate savings
- Marginal propensity to save increases with income and wealth; evidence cited for Germany and other countries.
- Empirical patterns:
  - One third of German households do not save (survey evidence cited).
  - Späth and Schmid (2016) estimate that 54-65 percent of aggregate saving is carried out by the top 10 percent wealthiest households in Germany.
- Mechanisms:
  - Closely-held firms: higher ownership concentration implies more closely-held firms where firm saving partly reflects personal incentives (tax incentives) of largest owners rather than pure profit maximization.
  - Tax incentives that favor retained earnings can strengthen the link between corporate saving and top household saving.

### Empirical results linking corporate saving and aggregate private saving (summary of Table 3)
- NFC Saving Change*Top wealth share:
  - 0.0113*** (t = 10.68)
  - 0.0113*** (t = 10.30)
  - 0.0113*** (t = 7.54)
  - 0.0117*** (t = 6.49)
- Top wealth share main effect:
  - 0.0547** (t = 2.45)
  - 0.0430 (t = 1.64)
- NFC Saving Change*Gini coef.:
  - 0.920*** (t = 9.60)
  - 0.907*** (t = 6.48)
- Gini coef. main effect:
  - 7.390 (t = 1.55)
- Model details:
  - N values reported across specifications: 110, 71, 81, 110, 71, 81
  - R2 values reported: 0.562, 0.564, 0.483, 0.585, 0.575, 0.543
  - Dependent variable: 5-year change in private saving rate; NFC Saving change are 5-year non-overlapping changes in the gross saving rate of the non-financial corporate sector.
- Interpretation:
  - Results strongly support prediction that with higher wealth inequality, overall private saving rates are more closely linked with corporate savings.
  - The positive and strongly statistically significant interaction terms (both with top 10% wealth share and net wealth Gini coefficient) support the view that part of the change in corporate saving is disguised household saving when wealth is highly concentrated.

### Micro evidence on business owners and wealth concentration
- Wealth/income ratio profiles across income quintiles (Figure 11):
  - Business owners with controlling stakes accumulate more wealth relative to incomes; in Germany the highest implied saving rates and saving differentials between business owners and non-owners occur toward the top of the income distribution.
  - In Germany private saving is highly concentrated at the top, particularly among rich business owners of closely-held firms, where boundaries between household and business savings are prone to be blurred.
- Wealth-to-income profile estimation summarized in Appendix Table A1:
  - Business owner coefficient examples: Business owner 1.345*** (DE), Business owner 1.889*** (EA excl. DE)
  - Business owner interactions with top quintiles show larger coefficients for higher quintiles (e.g., Business owner x Q5 1.230*** and 0.947*** in reported columns).
  - Dependent variable: Net wealth/income ratio; sample sizes and pseudo R2 reported in table.

### Feedback loops, longer-run dynamics, and macro implications
- Persistent, concentrated rise in private saving exacerbates wealth inequality over time:
  - Richer households have higher saving rates, so top-biased income trends (e.g., higher corporate profits) lead to higher saving rates by these households and over time to more wealth accumulation at the top.
  - The interaction between wealth inequality and private saving is mutually reinforcing.
- Cross-country evidence:
  - Variation in private saving evolution over the past 20 years explains over 23 percent the current cross-sectional variation in current wealth inequality across 27 countries in the sample (Figure 12).
- Macro consequences emphasized:
  - Wealth inequality shapes macroeconomic adjustment to shocks and secular trends, illustrated by German aggregate private saving and by extension current account balance in response to rising corporate profitability.

### Policy-relevant observations and structural drivers (from conclusion)
- Key takeaways:
  - Trends in increasing corporate profits and gross savings have widened top income inequality, as corporations are typically owned by households in the top of the wealth distribution.
  - The association between rising corporate profits and income inequality is stronger in countries with higher wealth inequality, where corporate ownership tends to be more concentrated among the wealthiest households.
  - Richer households have higher propensity to save, so that higher corporate profits and savings (or any other top-biased income growth) are associated with increased aggregate private saving rates when corporate wealth is concentrated.
  - Income-wealth inequality loops are self-reinforcing: top-biased income growth, reflected in rising private saving rates, results in even higher wealth inequality over time.
- Country-specific structural factors noted for Germany:
  - Low average rate of home and equity ownership leads household assets to be undiversified; bulk of savings for households below the top stored in saving accounts bearing low (or zero) deposit rates.
  - Concentration of privately-held and publicly-listed firm ownership in hands of industrial dynasties and institutional investors; literature links corporate ownership concentration to financial market frictions (credit markets, equity issuance, governance).
  - Policy-relevant mechanisms discussed in literature:
    - Reducing fixed costs for IPOs would significantly lower the share of private firms and wealth inequality in Germany (Peter, 2019).
    - Expanding venture capital financing and exit opportunities, reducing cost of equity issuance, could promote business dynamism and broader sharing of productivity gains.
    - The family business asset exemption of German inheritance and gift tax regime plays a role in entrenching wealth inequality and inequality of opportunity across generations.

*Source: IMF staff chapter 16 from the provided PDF content.*

### 2010. The Quarterly Journal of Economics, 129(3), pp. 1255–1310.

### TAX PRESSURES AND REFORMS OPTIONS

### Introduction
- Germany’s tax base is under pressure from base erosion and profit shifting by multinational businesses and from tax competition among countries, both intensified by digitalization.
- Germany has been a leader in adopting anti-avoidance provisions, allowing it, as a large economy, to maintain a tax rate higher than the OECD average.
- The paper examines:
  - International tax issues in light of the EU Anti-Tax Avoidance Directive (ATAD), the OECD Base Erosion and Profit Shifting Project (BEPS), and the U.S. Tax Cuts and Jobs Act (TCJA);
  - Implications of international tax architecture reforms for Germany, including interaction with the municipal business tax (LBT);
  - The labor tax wedge and reforms to reduce marginal tax rates, especially for secondary earners in couples.

### Rate and Base (German CIT system)
- Structure and rates:
  - Federal corporate income tax (FCIT, “Körperschaftsteuer”): 15 percent.
  - Local business tax (LBT, “Gewerbesteuer”): rate averages another 14 percent, with a statutory minimum of 7 percent.
  - Solidarity surcharge (“Solidaritätszuschlag”): 5.5 percent.
  - Both FCIT and LBT are levied independently and are nondeductible from each other.
  - Combined rate is roughly 30 percent, on average.
- Base and design features:
  - FCIT base has relatively few tax expenditures.
  - LBT is raised on a slightly broader base (adds back, among other items, 1/4 of interest payments; other specified additions and deductions described in statute).
  - For companies operating in more than one municipality, tax bases are allocated using a payroll-based formula.
- Role of LBT in municipal finances (2018):
  - LBT made up 78 percent of municipalities’ self-raised revenues.
  - LBT made up 41 percent of municipalities’ total revenues.
- Observed puzzle:
  - Despite high statutory and effective average tax rates, German CIT revenues are surprisingly low, reflecting in part a low rate of incorporation and potentially profit shifting of MNE profits to lower-tax jurisdictions.

### Germany’s FDI pattern and evidence of profit shifting
- German FDI pattern (percent of total):
  - Inward: Netherlands 19; Luxembourg 17; United States 10; United Kingdom 9; Switzerland 8.
  - Outward: Netherlands 17; Luxembourg 13; United States 12; United Kingdom 9; Switzerland 6.
- Indicators:
  - Share of gross operating surplus (GOS) of foreign controlled affiliates in total GOS in Germany is below the EU average.
- Literature estimates of profit shifting for Germany:
  - Macroeconomic approach:
    - Clausing (2016): revenue loss of 28 percent of German CIT revenues in 2012.
    - Tørsløv, Wier, and Zucman (2018): revenue loss of 28 percent of German CIT revenues in 2015.
  - Micro-elasticity approach:
    - Weichenrieder (2009): a 10-percentage point increase in the parent's home country CIT rate leads to 1/2 percentage point increase in profitability of the German affiliate.
  - Channel-specific estimates:
    - Hebous and Johannesen (2019): international service payments analysis finds a CIT revenue loss of about 3 percent.
    - Overesch and Wamser (2010): a 10-percentage point higher tax-rate difference between Germany and a foreign country leads to a 1.9 percentage point higher internal-debt ratio of MNEs.

### Impact of recent U.S. tax reform (TCJA) on pressures
- TCJA headline effect:
  - Reduced combined federal and state U.S. CIT rate from an average of over 39 percent to just over 25 percent.
- Implications for Germany:
  - The U.S. is an important location for German outbound FDI (12 percent of total).
  - Preliminary assessments:
    - Spengel and others (2018): predict a 25 percent increase in German FDI in the United States and a 9 percent increase in the opposite direction.
    - Beer, Klemm, and Matheson (2018): forecast a negative impact on capital stocks and reported profits in Germany.
    - Boumans and others (2019): survey evidence that German firms plan to expand U.S. operations; impact on investment into Germany is ambiguous.
  - Note: these studies may not fully incorporate novel TCJA features such as BEAT and GILTI.

### Anti-avoidance measures (design and unintended effects)
- Germany’s anti-avoidance toolkit includes:
  - Interest stripping rule limiting deductibility to a proportion of EBITDA (model for BEPS recommendation).
  - Strict Controlled Foreign Corporation (CFC) rules.
  - Detailed “function shifting” (exit taxation) provisions.
- CFC rules—three problematic aspects:
  - Threshold rate: statutory triggering threshold for CFC taxation set at 25 percent.
    - This threshold is now equal to or higher than statutory rates in many large jurisdictions (including parts of the United States), creating issues for outbound investment.
  - Broad definition of “passive” income: can capture activities that taxpayers view as active, especially outside the EU where the ECJ “substance” rule does not mitigate application.
  - Credit limitation interaction: foreign taxes creditable against FCIT only, not against LBT.
    - Example: US$100 of income taxed in the US at 21 percent yields a tax credit of US$21, but only US$15 can offset German FCIT; the total tax burden becomes US$15 (average LBT) + US$21 (US tax) = 36 percent, above the normal German combined rate of 30 percent.
- Function-shifting / exit taxation:
  - Germany’s function shifting rules are detailed in statute and stricter in interpretation than OECD transfer pricing guidelines Article IX in some respects.
  - German rules require valuing transferred functions from both the purchaser-offshore perspective and a “prudent German manager” perspective and use the average of the two estimates, which can lead to effectively taxing half of the gain twice (ex ante in Germany and ex post abroad).
  - Since adoption in current form in the 2008 Foreign Tax Act, these rules have been applied in about 160 adjustments.

### Reform options for Germany
- Broad approach:
  - As a relatively large economy, Germany can afford to maintain an above-average CIT rate because tax base elasticity is lower for larger economies.
  - Literature and evidence on the impact of U.S. rate cuts on Germany are ambiguous; some profit had already been shifted prior to the U.S. cut.
- Policies to encourage private investment where positive externalities exist:
  - R&D-targeted tax measures:
    - More effective than patent box regimes.
    - Germany traditionally relied on direct subsidies and is proposing R&D tax credits with an upper cap on qualified R&D of €2 million (Ministerial draft law of April 12, 2019).
    - Recommendation: the cap should be significantly increased, if not eliminated; no reason to restrict by firm size.
  - Accelerated depreciation:
    - Effective for cash-constrained firms; decreases user cost of capital by increasing present value of tax deductions.
    - Examples: higher first-year depreciation rates (Canada introduced triple first-year depreciation in 2018); the United States introduced full expensing of capital goods in 2018.
    - Accelerated depreciation benefits firms acquiring tangible assets; R&D wage spending for intangibles is typically already expensed.
- Reforms to anti-avoidance provisions:
  - Careful assessment of CFC threshold and interaction with foreign tax credits and the LBT is warranted to avoid excessive effective taxation of outbound investments.
  - Technical reforms to address inconsistencies arising from interaction of anti-avoidance provisions with other tax laws are needed.
- Labor tax wedge and policy:
  - Germany’s labor tax wedge is high, especially for secondary earners in couples.
  - Reforms should safeguard tax preferences for families while avoiding negative labor supply effects for secondary earners.

*Source: 1deuea2019002 - 2010. The Quarterly Journal of Economics, 129(3), pp. 1255–1310.*

### 15.      The unintended possibility of excessive taxation resulting from CFC rules can be

### 15.      The unintended possibility of excessive taxation resulting from CFC rules can be

### Controlled Foreign Corporation (CFC) rules — issues and remedies
- Problem: CFC rules can cause unintended excessive taxation where foreign tax rates exceed the FCIT and are not fully creditable.
- Remedies discussed:
  - Reduce the CFC threshold:
    - Reduces number of cases covered and the risk that countries are caught whose tax rates exceed the FCIT.
    - Would eliminate the risk if aligned with the FCIT rate.
    - Under ATAD, triggering rate is 50 percent of the applicable CIT rate in the home country; for Germany this would be 7.5 percent (as opposed to 25 percent) because the LBT is not counted for this ATAD purpose.
    - Recommendation: consider dropping the CFC threshold to 15 or 20 percent to serve its original purpose.
  - Make foreign taxes creditable against the LBT:
    - Advantage: continues to work under any future FCIT cut.
  - Revisit the definition of passive income.

### Exit taxation — efficiency considerations and German practice
- Efficiency criterion: whether exit moves erode the overall tax base or merely realize future location savings.
- German practice:
  - Exemption for “transfers of function” where more than 25 percent of the value transferred arises from intangible assets.
  - Valuation in such cases is on an asset valuation basis rather than on an entity/activity basis of future profit streams.
  - Rationale: avoid discouraging domestic R&D by preventing a transfer-of-functions tax when R&D results might preferably be used abroad.
- General concern: exit taxes can discourage investment; unclear how large this effect is relative to exit taxes in other advanced countries.

### Reactions to international developments — Minimum taxes
- Context:
  - 2018 U.S. reform introduced BEAT and GILTI implying minimum taxation of inbound and outbound investment.
  - A Franco-German proposal also proposes inbound and outbound minimum taxes with mechanisms to avoid double taxation.
- Assessment:
  - Unilateral adoption in Germany feasible and could protect its tax base.
  - International coordination (e.g., joint proposal at the Inclusive Framework) would be more effective.
  - If a large group of countries agreed on a common approach, it would dampen tax competition, allow source countries to raise CIT rates toward the minimum tax levels, and avoid competition for corporate headquarters among residence countries.
  - Coordination on implementation approaches would reduce compliance costs.
- Implementation issues:
  - Franco-German proposal is potentially more efficient but administratively harder because it depends on effective levels of taxation in the other country.
  - Low tax payments can legitimately reflect loss carry forward or accelerated depreciation, complicating measurement.
  - In Germany, the LBT creates a difficulty: to prevent inbound investment in Germany from being subject to minimum taxes in home countries, the LBT must be counted. This may be difficult to defend unless credit for foreign taxes is given against the LBT.

### Digitalization and allocation of taxing rights
- Distinction: adequate level of taxation vs. allocation of taxing rights.
- Warnings:
  - Avoid ring-fencing a “digital” sector; the economy is increasingly digitalized making identification difficult or impossible.
  - Ad hoc taxes (especially turnover taxes), if uncoordinated, can lead to over-taxation of actual profits, economic distortions, and strong threshold effects.
  - Germany has avoided such ad hoc taxes for this sector.
- Market-country taxing rights:
  - Debate about whether market countries should tax income arising from sales/activities in their jurisdictions represents a major shift.
  - Suggestion: extend the definition of “economic presence” to establish taxing rights, ideally via a new international consensus.
  - Permanent establishment concept historically required physical presence; OECD debate considers broader presence due to market penetration without physical presence.
  - US Supreme Court decision (South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018) (138 S. Ct. 2080)) found physical presence concept makes less sense for modern economy/technology.
  - No data available to assess implications for Germany of broader permanent-establishment concept.

### Formulary methods and EU proposals
- Formula apportionment (FA) overview:
  - Consolidates accounts at the group level (unitary taxation), mitigating classical profit-shifting among related entities though allocation-factor manipulation remains possible.
  - Consolidated profit allocated across jurisdictions using a formula (production-location factors and/or sales).
  - Greater weight on sales shifts tax toward a destination-based system and makes it more robust to tax competition.
  - Requires agreement on a common tax base for efficiency; jurisdictions keep sovereign tax-rate choices.
- EU common consolidated corporate tax base (CCCTB):
  - CCCTB is a form of FA; reduces opportunities for transfer mispricing and other tax planning within the EU, though profit shifting outside the EU remains possible.
  - Estimates:
    - Fuest, Hemmelgarn, and Ramb (2007) estimate CCCTB would reduce the German CIT base by 17 percent.
    - European Commission (2016) found German CIT revenues would decline by 0.24 percent of GDP (about 15 percent of CIT revenue) as a result of the CCCTB.
  - Counterpoints:
    - Revenue losses could be smaller with a slightly broader tax base than in the current proposal.
    - Consideration of reduced administrative costs and future losses from profit shifting.
    - Corporate tax rate could be adjusted if necessary.
- Residual profit allocation (RPA):
  - Preserves arm’s length pricing for routine profits; residual (total group profit minus routine profits) allocated by formula (e.g., sales by destination).
  - RPA may be relatively easier to implement and more likely to be revenue neutral for Germany.
  - Challenges:
    - Definition and proxy for routine profits are critical and contentious; estimates that Germany currently taxes profits roughly equal to routine returns based on a markup of 10 percent of the economy fixed assets depend on the proxy used.
    - Allocation/redistribution across countries depends on chosen formula.
- Interaction with Germany’s LBT:
  - LBT could obstruct CCCTB or a global FA if maintained independently because it would still require transfer prices to determine its base.
  - One solution: align the LBT tax base with the FA base; then the tax base allocated to Germany could be allocated among municipalities by a different formula.
  - Note: some constitutional constraints to full equalization of tax bases exist.

### Destination-based cash-flow taxes (DBCFT)
- Status: DBCFTs are not currently on any country’s agenda.
- Potential impact on Germany:
  - Hebous, Klemm, and Stausholm (2019) estimates: countries with trade surpluses and high incomes are generally more likely to lose revenue under a DBCFT.
  - 2011 hypothetical DBCFT estimate found Germany would gain revenue from a hypothetical DBCFT in 2011 due to weak revenue performance of the current CIT; updated data show Germany would likely lose revenue from a DBCFT in more recent years as the trade surplus increased further.
  - Additional considerations:
    - Businesses currently under PIT moving to a DBCFT could increase PIT revenue losses.
    - A unilateral adoption in another country could have severe repercussions for Germany because the DBCFT-adopting country’s effective tax rate on export-related rents would be zero, creating incentives to shift activity and profits into that country.

### Labor taxes — Personal Income Tax (PIT) design and labor supply effects
- PIT structure and thresholds:
  - Subsistence level (currently €9,168) is not taxed.
  - Marginal rate rises steadily (with the slope changing once) from 14 to 42 between €9,168 and €55,960.
  - Marginal rate remains flat at 42 percent above €55,960, with one step rise to 45 percent at €265,326.
- Joint assessment of married couples:
  - Taxes married couples at their average income; reduces average tax rate but raises marginal tax on the secondary earner, reducing incentive to supply labor.
  - Example: with a spouse earning €40,000, marginal tax rate for secondary earner increases dramatically for low-paying work compared to singles.
  - Extreme case: with partner earning twice the threshold for the maximum PIT rate (i.e., €0.53 million), the marginal tax rate would be 45 percent from the first euro earned by the secondary earner.
  - Conclusion: increased marginal tax rates for secondary earners reduce incentives to supply labor at extensive and intensive margins for low-paying jobs.
- Legal constraints and tradeoffs in reform:
  - Many advanced economies moved toward individual taxation; this resolves high marginal rates for secondary earners but treats households with similar incomes differently depending on income distribution.
  - German legal context: subsistence level must remain untaxed; tax-free allowance set at subsistence level for an individual and automatically doubles for a couple under current system.
  - Move to unadjusted individual taxation causes issues for one-earner couples legally obliged to support the other but would be tax-exempt on only one-person subsistence.
  - Constitutional constraint: must not treat a married couple less favorably than two individuals; prevents any “marriage penalty.”
  - Individual taxation is not ruled out but marriage penalty must be avoided.

### Evaluated reform proposals for PIT and couples’ taxation
- Scientific Advisory Council to the Federal Ministry of Finances assessment of three proposals (BMF, 2018a):
  - Real splitting:
    - Couples taxed individually but can transfer income between themselves up to a maximum amount.
    - Similar to current system except capped benefit; little impact except for couples with very large differences in earnings.
  - Transfer of unused allowance:
    - Individual taxation but allows transferring any unused part of the tax-free allowance.
    - Still discourages secondary earners from taking up work because it causes loss in tax benefit of the first earner at their higher tax rate.
  - Additional married couples’ allowance:
    - Individual taxation plus an additional allowance for married people, withdrawn at 50 percent of the partner’s income.
    - Still involves high marginal tax rates for secondary earners but the 50 percent withdrawal rate mitigates this compared to other proposals.
- Two additional proposals prepared by the mission (both start from individual taxation and ensure the subsistence level for a couple of €15,540 remains tax free even if there is only one earner):
  - Tax allowance for couples:
    - Offer one additional allowance of €6,372 for couples; each partner keeps one standard allowance.
    - The additional allowance would not be withdrawn, avoiding negative labor supply impact on the spouse.
    - Disadvantage: favors well-off individuals for whom the allowance is worth more.
    - Effect: reduces marginal tax rates for secondary earners so they match those of a single until both incomes are equal; thereafter marginal rates briefly below those for a single as it makes sense to shift the additional allowance to the higher earner.
    - Revenue impact likely negative; estimating requires micro data unavailable to the mission.
  - Tax credit for couples:
    - Offers a tax credit worth exactly the tax an individual would pay on income of €15,540 (the subsistence level for a couple), which comes out at €1,277.
    - The credit would not be withdrawn, avoiding any increase in marginal tax rate of secondary earners.
    - Effect: achieves a perfect match of marginal tax rates with those of an individual.
    - Static revenue impact of this reform is slightly positive.

*Source: IMF staff report (selected excerpts).*

### 31.      Under the reform proposals, however, average tax rates would be higher for

### Under the reform proposals, however, average tax rates would be higher for

### Effects on married households and secondary earners
- Under the reform proposals, average tax rates would be higher for households with very low earning spouses compared to the current system, revealing a tradeoff between ensuring work incentives and treating households similarly independent of their income distributions.
- Average tax rates remain below what they would be if simple individual taxation were adopted (Figure 8, right panel).
- At higher earnings levels the average tax rates for the second spouse are somewhat lower under the proposed system than the current one.
- The current joint system costs €22.6 billion compared to individual taxation (BMF, 2018b).
- The cost of the tax credit would be up to €22.5 billion (calculated as €1277 per couple for 17.6 million couples (Statistisches Bundesamt), which is a slight over-estimate, as not all couples will have sufficient tax liabilities to use up the full credit).

### The labor tax wedge and the solidarity surcharge
- A surtax (so-called solidarity surcharge) equals 5.5 percent of the PIT liability.
- The solidarity surcharge was partly motivated by the need to cover the costs of German reunification; its revenues are not formally earmarked.
- According to the current coalition agreement, it is meant to be abolished for lower and middle incomes from 2021.
- The surtax structure makes the system less transparent than a simple increase in tax rates; structurally it accrues to the federation, while PIT is split among the federation, the federal states, and the municipalities.
- Introducing a temporary progressive tax (such as the solidarity surcharge) implies that its simple abolition is necessarily regressive, creating potential political pushback.

### Social security contributions and the shape of the total tax wedge
- Social security contributions total 38.75 percent.
  - Pension: 18.6 percent
  - Unemployment: 2.5 percent
  - Health: 14.6 percent
  - Long-term care: 3.05 percent
- Upper earnings limits:
  - €80,400 for pensions and unemployment
  - €54,450 for health and long-term care
- Half of the contributions are paid out of the wage and the other half is paid by the employer (which does not indicate the incidence).
- The employee’s share of contributions is to some extent deductible from PIT; they are deductible up to a limit of €1900. However, if long-term care and 96 percent of health contributions alone exceed this amount, they are deductible without limit.
- The resulting total marginal tax wedge peaks at around 64 percent for taxable incomes just below €54,450.
- The marginal and average wedge schedule is progressive over some range and regressive thereafter; the regressive part results from upper earnings limits for social insurance contributions.
- From a taxpayer perspective:
  - Pension and unemployment insurance contributions lead to earnings-related entitlements (thus represent savings or insurance fees).
  - Health and long-term care contributions lead to entitlements that are not earnings-related and are much closer to taxes in nature.

### Reform implications and options to address high wedges
- The PIT reforms considered would reduce the total tax wedge for secondary earners, but the wedge would remain quite high due to social contributions, still exceeding 30 percent on the first euro (Figure 10).
- Potential measures to further reduce the wedge:
  - Consider reducing health contributions, given the free insurance of spouses implies a spouse beginning to work pays contributions without getting additional health benefits; an additional charge for insuring otherwise uninsured spouses in single earner households would address this.
  - Cuts in the PIT or social security contribution rate to address very high marginal tax wedges around the median—suggestions include flattening the PIT schedule by increasing the starting point for the 42-percent tax band or reducing one of the social contributions with a weak link to entitlements (health or long-term care).
    - Any resulting shortfall in the insurance funds should be covered by budgetary transfers from general revenues.
  - Lower the health contribution rate while raising or abolishing the upper limit in a revenue-neutral fashion.
- Preferred approach considerations:
  - If the reduction is achieved by reducing social security contributions, it would be preferable to reduce the employees’ share to add more rapidly to disposable income and support external adjustment in the short term (with wage agreements fixed).
  - In the long run, it is irrelevant whether employers’ or employees’ contributions are cut; short-run dynamics matter.

### Marginal employment regimes: mini jobs and midi jobs
- Mini jobs:
  - Alternative regime for jobs paying up to €450 per month; more than one such job can be taken provided total earnings remain below this limit.
  - PIT covered through a final 2 percent charge.
  - Social security contributions are reduced from 38.75 to 31.7 percent, or to 28 percent if the employee opts out of the pension insurance.
  - Unlike the usual split, the employer is liable for the full 28 percent, the employee only covers the optional 3.7 percent pension contribution.
  - Apart from pension rights (if chosen), reduced social security charges do not provide entitlements (i.e., to health, long term care or unemployment benefits).
- Drawbacks of the mini job scheme:
  - For low-income individuals, the scheme implies higher taxation than the standard system, under which such incomes would remain below the annual tax-free allowance.
  - Social security contributions under the scheme do not earn entitlements (other than optionally for the pension system).
  - The scheme is mainly attractive for minor additional jobs or married individuals whose spouse is employed.
  - It encourages labor supply of secondary earners but only for minimal activities; suggested allowance or credit for couples would achieve a greater tax reduction for larger incomes of secondary earners.
  - Applicability is unrelated to earnings in any regular employment, providing beneficial tax treatment without regard to overall economic situation.
  - Creates threshold effects, preventing employers from raising hours or pay incrementally; marginal tax rates can exceed 100 percent when exceeding the threshold if the personal allowance is already used by another job or the spouse’s income.
  - Severe restrictions to entitlements related to social security charges may create vulnerabilities (e.g., spouses in secondary employment will not earn independent entitlements to unemployment).
- Midi jobs:
  - Apply for earnings between €450 and €1300 (€850 until July 1, 2019).
  - All standard taxes apply, and the employer pays the standard rates.
  - Social security contributions are phased in for the employee, while leading to the usual entitlements.

*Source: IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1deuea2019002.pdf_