Changes in German Income Tax from 1990 to 2010

Reader Taurus provided a link to an interesting study published by the Bund der Steuerzahler (Association of German Taxpayers).

The study compares the income tax burden in 1990, 2005 and 2010.

It concludes that low and very high incomes have enjoyed a significant lowering of their tax-rate, whereas the middle and upper middle class are being taxed ever more heavily.

Some examples for different annual taxable incomes:

8,078 €:

8.4 % average tax-rate in 1990
0.0 % tax in 2005, 0.1 % tax in 2010
=> 99 % less tax in 2010 compared to 1990

16,157 €:

14.7 % in 1990
10.7 % in 2005, 11.1 % in 2010
=> 24 % less tax in 2010 compared to 1990

64,627 €:

27.5 % in 1990
30.2 % in 2005, 31.0 % in 2010
=> 13 % more tax in 2010 compared to 1990

807,841 €:

50.7 % in 1990
43.2 % in 2005, 45.4 % in 2010
=> 10 % less tax in 2010 compared to 1990

The "critical income-bracket", which saw an increasing average tax-rate, goes from 29,000 € to 112,000 € annual taxable income. Above and below this bracket, the average tax-rate went down.

The reasons for this strange development are fourfold:

1. The constitutional court ordered the German government to stop taxing the "Existenzminimum" (minimum income required to live).

2. The top-bracket was lowered from 53 % to 42 % (+Soli) and then raised again to 45 % (+Soli) for very high incomes (>250,000€).

3. You'd expect that lower taxation of low and very high incomes also implies lower taxation in the middle. However, to make up for the tax-base erosion caused by the tax-free minimum income, it was decided to increase marginal tax-rates. As a consequence, middle-income earners (those not earning enough to make substantial savings from the lower top-bracket rate) did not profit at all.

4. German tax-brackets are not inflation-indexed. In other words, somebody receiving pay hikes equal to inflation keeps reaching ever-higher tax-brackets, i.e. his after-tax salary rises less than inflation. It doesn't make a huge difference from one year to the next. But over time, small effects accumulate.

(Note: In the study, the 2010 income is compared to adjusted 1990/2005 income taking into account that average incomes grew at a rate of 2.3 % p.a.)