Effective Taxation for Recipients of Social Assistance in Germany and the Consequences of the 1996 Tax Reform

November 1, 1995

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Christian Thimann. Effective Taxation for Recipients of Social Assistance in Germany and the Consequences of the 1996 Tax Reform, (USA: International Monetary Fund, 1995) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper explores the problem of effective taxation at the lower end of the income scale in Germany. For the recipients of social income maintenance--currently about 1.8 million nationals--effective taxation consists not only of the explicit taxation through the tax code but also of the implicit taxation through the withdrawal of benefits. The paper calculates effective tax rates for recipients of social assistance; it is shown that for labor incomes in the lower income range explicit and implicit taxation add up to a marginal burden of just under 75 percent on average. The 1996 tax reform alleviates the explicit tax burden on low incomes, but it does not alleviate the total marginal burden on labor earnings of welfare recipients. It increases net incomes, but since the withdrawal of benefits increases with net incomes, too, the overall burden remains practically unchanged. Therefore, effective welfare traps remain prevalent; these could only be avoided through a reform of the system of social assistance and withdrawal. Constraints and possible steps for reform are discussed.

Subject: Employment, Income, Labor, Marginal effective tax rate, National accounts, Non-wage benefits, Wages

Keywords: Earnings disregard, Employment, Income, Labor income, Net benefit, Non-wage benefits, Reference wage choice, Reference wage level, Social assistance, Tax payer, Transfer recipient, Wage earnings position, Wages, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/120
Stock No:

WPIEA1201995
ISBN:

9781451854213
ISSN:

1018-5941

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