Longtime German policy adviser, Clemens Fuest knows how to sell proposals. The head of the Ifo Institute announced a reform idea which “we believe will bring considerably more jobs and which will ultimately cost the State nothing”. And already the start of his lecture, which he gives in the Munich Economic Debates event series, a cooperation of Ifo and Süddeutsche Zeitung. The study assumes that after a reform, 400,000 additional citizens would participate in working life, for which the state would spend less than a billion euros per year, but not nothing.
The catalog of reform measures consists of four parts. This includes a review of the “part-time trap”. This applies, for example, to Hartz IV beneficiaries who wish to top up and decide to work more. It can still happen that a little more gross income means that they ultimately have less net money. In addition, the idea of reform includes a reorganization of family taxation. On the one hand, because a so-called real splitting of the spouse would replace the previous splitting of the spouse: The legal support allowance would still be transferable to the second support, but no longer half of the income as before. On the other hand, family allowances would be doubled and increased to just under 12,000 euros.
The research group around Fuest is also looking into the abolition of the solidarity surcharge. “Because of the constitutional court, it will probably fall soon anyway,” he said. In return, he proposes to raise the top tax rate from 42% to 44% and raise the tax rate for the rich from 45% to 47%. The result would only be compensation for the loss of solos, but not a tax increase for high earners, Fuest assures us. In addition, the reform would provide for an increase in the basic allowance to 10,500 euros, as well as an increase in the flat-rate wage allowance for income-related charges from 1,000 to 1,200 euros.
The influence of the reform on workers calculated by Fuest would be enormous: 400,000 citizens could enter the labor market or develop their jobs after the measures are implemented. “This means that some people who previously had no income will go to work and others will switch from part-time to full-time or simply work more hours,” says the economist. This would lead to more jobs, in particular in the Hartz IV system, in the low-wage sector and, thanks to the shift to real splitting, also among second incomes. “They are mostly women,” says Fuest.
The middle class and families with children would benefit the most
The tax reductions that would result from the reform would be very widely distributed, but would mainly affect low and middle incomes. For example, employees whose annual income is between 25,000 and 35,000 euros per year would have 500 euros more available to them. If the reform were actually implemented, each household could expect on average one percent or 383 euros more per year. A family with children earning around 57,000 euros would even have an annual surplus of more than 1,000 euros. “Overall, it’s important,” says Fuest.
From now on, no reform can do without losers. In the present case, according to Fuest, for Hartz IV beneficiaries, it would mainly be single people without children who would be a little more stressed and married people without children. “They are currently benefiting a lot from spousal splitting.”
The proposals of the Institute for Economic Research and its president do not stop there. Even before the idea of reforming the income tax system, Fuest advocated accelerating the depreciation of capital goods in another study. In terms of income tax, the economist criticizes the tax exemption of capital gains if a property is sold only after ten years (“taxation gap”). He also considers that the business tax is poorly localized in municipalities due to recent significant fluctuations during the pandemic and would prefer to remove it. Among these and other remarks on current tax policy, however, the call for revenue management reform forms the core. “Our hope is that the coalitions in Berlin also take a look,” said the president of Ifo.