German Income Tax Research Articles

A Multi-state model of state dependence in labor supply: Intertemporal labor supply effects of a shift from joint to individual taxation

In this paper I develop an intertemporal discrete choice model of female labor supply to analyze the effects of true state dependence and its effect on labor supply behavior over time. The estimation results show that state dependence is significantly positive at the extensive margin and lower but in general still significant at the intensive margin. I apply this model to study the short and long run labor supply effects of a fundamental reform of the German income tax system, i.e. the shift from joint to individual taxation of married couples and show that labor supply responses are significantly higher in the long run than in the short run.

Top Income: A Distribution Analysis for Liberal Professions, Entrepreneurs and Employees - A Microanalysis based on the German Income Tax Statistics

The distribution of societal resources is of high societal, economic and social policy importance. What is missing are reliable data above all about high income. This study will contribute to a well-founded analysis of high income for self employed – as (liberal) professions and entrepreneurs – and as employees, central groups of the labour market and the society at all. Before the background of requirements to a database and given official and non-official data sources we characterize our microdata base, the wage and income tax statistic 1995, a population statistic , which in particular is well-suited for the analysis ogf high income. We describe the used economic income concept and our 10% sample with about 3 Million anonymized tax records. For the first time we then present distributional and re-distributional results based on all income areas and for alternative high income thresholds – millionares and 200% of the mean – for professions, entrepreneurs and employees.

Richness in Germany: High Incomes, Their Structure and Distribution - A Microanalysis with the German Income Tax Statictics for Self-Employed and Employees

The distribution of societal wealth and income is of central importance for the economic, social and cultural development of a country. Independent of the respective economic and social scientific perspective the income distribution is a central brick explaining economic growth and labour market development.This article’s income distribution contribution is by pinpointing the situation of the income rich. Sound information about high income, its structure and distribution is presented based on the anonymized individual records of the income tax statistics 1995 for the first time. Embedded in a distributional analysis over the entire income range the paper concentrates on the distribution and re-distribution of high income by different ‘richness’-definitions for self-employed and employees. In addition the socioeconomic structure of the rich compared to the non-rich is described. The significance of the competiting patterns in explaining the probability to be rich is finally shown by a multivariate PROBITanalysis. The paper is a revised and compressed version of my contribution to the first poverty and Wealth Report of the German government.

Income Richness of the Elderly in Germany - New Richness Indicators and Results from the German Income Tax Statistics (Fast 2001)

This contribution analyzes income richness of elder persons in Germany in 2001. Using actual data of the German Wage and Income Tax Statistics, which are particularly suitable for the analysis of high incomes, new richness indices are discussed and new results are presented. It appears that the the number of rich people in upper age groups are below the average. But deepening results point out the fact that the richness intensity and the concentration of high income are particularly pronounced for upper age groups. Taking into account partial components, which are necessary to the representation of richness, an above-average relevance of income richness can be ascertained for the elderly in Germany in 2001.

Higher Tax Rates on Labor? Evidence from German Panel Data

This contribution investigates the justifiable spread between labor and capital income tax rates under a dual income tax, based on arguments put forth in Nielsen and Sorensen (1997). An efficient generalized instrumental variables estimator proposed by Hausman and Taylor (1981) is employed in a Mincer-type wage equation, which is estimated on recent data taken from the German Socio-Economic Panel. The estimated wage patterns yield approximations of the required divergence between the tax rates on labor and capital income for the case of university graduates. The required surcharges are sizable and exceed the ones prevailing under the current German income tax system.

How Progressive is Germany? Comparing the Redistributive Effects of Tax Benefit Systems in Europe (Wie progressiv ist Deutschland? Das Steuer - und Transfersystem im europäischen Vergleich)

When comparing tax benefit systems across Europe, Germany is usually regarded as a country with a high level of taxes and contributions which is often seen as a main challenge for the economic performance of the welfare state in terms of growth and unemployment. Especially the progressive structure of the German income tax is subject to various criticisms in the ongoing policy debate in Germany. In this paper, we compare the progressivity and redistribution induced by the tax benefit systems in the EU-15 countries. In contrast to previous studies, we do not focus only on the income tax system but additionally consider social insurance contributions and cash benefits for a complete analysis of the whole tax benefit system. Our analysis is based on EUROMOD, a static tax benefit microsimulation model for the EU-15 countries, which allows analysing the tax benefit systems in a common framework. We compute several measures of progressivity and redistribution for the whole tax benefit system as well as for the single components. We compare the values of these measures across countries to rank the countries according to their progressivity and level of redistribution. Our analysis shows that there is considerable variety with respect to progressivity and redistribution across the countries. We show that the German system as a whole employs only a medium level of redistribution, which contradicts to some extent the existing German literature. However, this effect can be decomposed into a highly progressive income tax system, a highly unequal pre-tax income distribution and regressive social insurance contributions as well as regressive transfers. Therefore, when thinking of reforming the highly progressive income tax system, one has to take into account the regressive effects of the other elements of the tax benefit system.

The Short-Term Fiscal Effects of the Preferential Treatment for Non-Incorporations' Retained Earnings

With the 2008 reform of business taxation (Unternehmensteuerreform 2008) a preferential treatment of retained earnings for non-incorporated companies was introduced: Earnings may be retained at a preferential tax rate (29.8%) and will be subjected to supplementary tax (26.4%) when they will be withdrawn in the future. By now, studies on this topic have been based on case studies. Our article is based on microdata of the German Income Tax Statistics 2002 and provides a general empirical analysis of the new regulation's fiscal effects. Unlike studies before, we do not only consider marginal tax rates but also take into account that retained earnings may reduce progressive income tax for other earnings. Moreover we consider that taxpayers may retain earnings without having to pay supplementary taxes on these earnings if they are withdrawn within two years. On the individual level, beneficiaries of the preferential treatment are mainly taxpayers with high income. For instance, those with an annual income of at least 750,000 Euro reduce their tax burden by approximately 10% (unmarried, withdrawal before retention of 100,000 Euro). By contrast, taxpayers with an annual income of less than 22,087 Euro do not benefit from the reform at all. On the macroeconomic level, the fiscal effects of the reform are considerable: Depending on the scenario, we estimate a shortfall in receipts of 3.4 bn, 5.0 bn Euro and 7.5 bn Euro (theoretical upper limit).

Does a Simpler Income Tax Yield More Equity and Efficiency?

This article investigates the impact of tax simplification on various indicators of the efficiency of the tax system and on the distribution of income. The analysis is based on a simulation model (FiFoSiM) using German income tax and household survey microdata. We model tax simplification as the abolition of a set of deductions from the income tax base. We find that this form of tax base simplification leads to a reduction in the use of professional tax advice, a more equitable income distribution and an increase in tax revenue. If this is combined with a reduction of income tax rates to preserve revenue neutrality, the effects depend on the type of rate schedule adjustment. The combination with a flat rate tax increases income inequality at the expense of the middle class, but it also leads to efficiency gains because tax distortions of labour supply are reduced. The combination with a rate schedule adjustment, which preserves the directly progressive schedule reduces inequality but increases overall tax distortions. We conclude that the effects of tax base simplification on after tax income inequality and tax distortions mainly depend on the type of tax schedule adjustment. (JEL Codes: D3, H2, J22)

Notional Income from the Cross-border Internal Transfer of Assets – Why the Amendments to the German Income Tax Act Violate the Freedom of Establishment

Notional Income from the Cross-border Internal Transfer of Assets – Why the Amendments to the German Income Tax Act Violate the Freedom of Establishment

Richness in Lower Saxony and Other German Federal States (Bundesländer) - Results Based on the German Wage and Income Tax Statistics 2003 for Professions, Entrepeneurs and Employees

This contribution analyzes top incomes in the German Federal States for 2003 with focus on Lower-Saxony. Based on the microdata of the German Wage and Income Tax Current Statistics (Einkommensteuer-Geschaftsstatistik) for the first time richness rates and intensities of richness are examined for the self-employed as professions and entrepreneurs as well as for employees. We found large differences between the German Federal States and occupational groups. Even if the share of rich persons in the group of self-employed are substantially higher than in the group of employees the situation of the self-employed varies much between the German Federal States.

Methods of interpolations illustrated on the interpolation of the German income tax tariff

Increasing complexity of economic models evolve optimization problems that are not differentiable any more. To solve that problems heuristic optimization or approximation methods have to be used. In this article three methods of polynomial interpolations are summarized and explained. The three methods are in detail the Lagrange interpolation method, the Newton interpolation method and the interpolation using the monomial basis. The advantages and disadvantages of approximation methods such as the polynomial interpolation are illustrated by approximating the German income tariff function.

Measuring Richness and Poverty - A Micro Data Application to Germany and the EU-15

In this paper, we define a new class of richness measures. In contrast to the often used head-count, these new measures are sensitive to changes in rich person's income and therefore allow for a more sophisticated analysis of richness. We demonstrate the application of these new measures to analyse the development of poverty and richness over time in Germany, to compare Germany to the other EU-15 countries and to investigate the impact of tax reforms on poverty and richness. The latter analysis is based on micro data provided by the simulation model FiFoSiM using German income tax and household survey micro data. We show that it partly depends on the measure whether the development of richness in Germany is increasing or decreasing. The cross country analysis yields several groups of countries according to their values of poverty and richness indices. The new richness measures show that the effects of flat tax reform scenarios depend on the reform parameters. Using these examples, we show the importance of taking into account the dimension of changes and not only the number of people beyond a given richness line (headcount). We propose to use the new measures in addition to the headcount index for a more comprehensive analysis of richness.

Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany

Which role do individual income prospects play in the decision to be an entrepreneur rather than an employee? In a model of occupational choice, higher expected after-tax earnings attract people to self-employment, while more risky net earnings deter risk-averse individuals. In this paper I analyse the expected value and variance of income in self-employment and dependent employment empirically, accounting for selection. Based on this analysis, structural models of self-employment entry and exit under risk are estimated, which include a standard risk aversion parameter. The model predicts that the German income tax reduction of 2000 induced smaller exit rates out of self-employment for men and smaller entry rates for women.

Some Remarks on the Employment of the Stylized Income Tax Rate for Valuation of a Company by the IDW

This article deals with the question whether the stylized income tax rate of 35 per cent used up to now by the IDW for valuation of companies has been properly calculated and whether it is still appropriate to use this income tax rate. The stylized income tax rate is an average tax rate, calculated empirically on the basis of 1989 German tax law as well as the personal income distribution in 1989. However, valuation of a company requires marginal tax rates. By the use of micro simulation and group simulation models we empirically demonstrate on the basis of German income tax data that due to the progressive German tax schedule an average tax rate can not serve as a proxy for a marginal tax rate. Therefore it is necessary to use a stylized income tax rate which is determinated by empirically calculated marginal tax rates. As a result of several tax cuts in recent years marginal tax rates in 2006 are considerable lower than in 1989. Therefore the employment of a stylized tax rate by the IDW that is based on dates of 1989 is inappropriate. Furthermore the empirical results falsifies the assertion that effective tax rates are unaffected by tax cuts due to simultaneous extensions of the tax base. Another finding of this article is a considerable variation of the empirical marginal tax rate depending on the group of taxpayer considered.

Does Tax Simplification Yield More Equity and Efficiency? An Empirical Analysis for Germany

This paper investigates the impact of tax simplification on various indicators of the efficiency of the tax system and on the distribution of income. The analysis is based on a simulation model (FiFoSiM) using German income tax and household survey microdata. We model tax simplification as the abolition of a set of deductions from the tax base included in the German income tax system. We find that this form of tax base simplification leads to a reduction in the use of professional tax advice, a more equitable income distribution and an increase in tax revenue. If these measures are combined with a reduction of income tax rates to preserve revenue neutrality, the effects depend on the type of rate schedule adjustment. The combination with a flat rate tax implies redistribution in favour of very high incomes, and an overall increase in income inequality. Efficiency effects in terms of changes in marginal tax rates and labor supply effects are mixed. The combination with a rate schedule adjustment which preserves the directly progressive rate schedule yields a tax reform which reduces the inequality of after tax incomes. We conclude that tax simplification may improve the efficiency of the tax system without increasing inequality of after tax income.

Effects of Alternative Tax Reform Models on the Income Distribution of Liberal Professions and Other Occupations

Based on comparisons between the former German tax system and the tax reform of 2000/2005 and other tax systems which were up for discussion this study investigates the (re-) distribution effects on the self employed (professions and entrepreneurs) and other socioeconomic groups. Additional the distribution of inequality of single socio-economic subgroups in comparison to the overall inequality is analysed by using the decomposition method. The analysis is based on anonymised microdata files of the German Income Tax Statistics, provided by the Fedaral Statistical Office. These files allow significant analysis of selfemployed. In contrast conventianal surveys produce only insufficient conclusions about income and tax burden of self employed.

The Rise and Likely Fall of the German Income Tax, 1958-2005

Data from o¢ cial statistics and tax laws are exploited in order to describe …fty years of income tax in Germany, with a focus on its role as a …scal and distributive tool. The temporal pattern that emerges is one of a golden age of the German income tax, followed by a slow shift towards a major crisis. The turning point on the income-tax path seem to have occurred in 1986. I put forward the thesis that the downturn was the outcome of a long-term change in the balance of political power. That change is rooted in structural changes that occurred in the German economy during the 1970s and early 1980s.

Union wage setting and progressive income taxation with heterogeneous labor: theory and evidence from the German income tax reforms 1986–1990

This paper analyzes the effects of tax shifting in a model with union wage setting and progressive income taxation. The setup allows for different skill levels of the workforce and accounts for the union's distributional objective of income equality. The theoretical predictions of the model are empirically tested with a panel of German micro-data covering the period of the income tax reforms 1986–1990. It is shown that average taxes raise wages, whereas increasing the progressivity of the tax system reduces wages. The effect of progressivity on high-skilled labor tends to be less significant and smaller. Stronger preferences for equality compress the (pre-tax) wage distribution.

Taxpayers’ attitudes, behavior, and perception of fairness

This paper investigates taxpayers’ attitudes, behavior, and perception of fairness with respect to taxation using data drawn from a survey among German employees. It is shown that there is a large gulf between subjects’ attitudes towards taxation and their behavior. Although most subjects profess that their own taxation is either too high or far too high, up to 60 percent of them judge tax burdens to be fair which exceed actual taxation by far. Moreover, the great majority of those subjects opting for a proportional tax scale implicitly state tax burdens which are consistent with a progressive tax scale only. Finally, we find overwhelming rejection of one of the core elements of the German income tax system, namely spouse tax splitting.

EC Tax Scene: German Tax Reform – Obligation to Reinstate Original Values in Connection with s. 50c of the German Income Tax Act

EC Tax Scene: German Tax Reform – Obligation to Reinstate Original Values in Connection with s. 50c of the German Income Tax Act