The German Tax and Transfer System

How do tax allowances in the existing German tax system affect the tax burden of different income deciles and household types? This question is examined in a study conducted under the scientific direction of Prof. Dr. Andreas Peichl (ifo Institute) using selected examples. Based on this, the study simulates the conversion of tax allowances into lump-sum tax credits as a transfer payment. 

The study concludes that the current system of tax allowances provides regressive relief, meaning that high-income households benefit more from tax allowances than low-income households. The analysis shows, for example, that the absolute relief effect of the basic allowance, which is intended to guarantee a fixed tax-free minimum subsistence level, increases continuously with taxable income. 

The conversion of tax allowances into flat-rate, non-means-tested tax credits offers the potential to facilitate access to transfer payments by linking the tax and social security systems, thereby remedying the problem of non-take-up in the current reference system. In addition, this conversion would offer the potential to remove the current tax preference for higher-income households and thus improve the position of low-income households in the tax system.