Inequality in Germany: A Macroeconomic Perspective

Abstract

Household surveys such as the German Socio-Economic Panel (SOEP) tend to underestimate income and wealth inequality. The research methodology developed by Thomas Piketty et al. therefore analyses official tax statistics in order to more accurately determine the inequality between the people at the top of the income and wealth distribution scale and the rest of the population. However, Piketty’s methodology underestimates the rise in inequality in Germany since the turn of the millennium due to the fact that companies are retaining a significant percentage of their rising profits which are therefore not recorded as private household income. We show how the specific pattern of income distribution in Germany has contributed to the country’s large and persistent current account surplus, thereby contributing to macroeconomic instability at the international level. We note that addressing economic inequality in Germany politically through wealth and inheritance taxes faces the resistance of powerful lobby groups including family-owned businesses (the German Mittelstand).