The German welfare state is generous, but this leads to implicit tax rates for welfare recipients that can exceed 100%. Here’s a useful summary from the German newspaper Handelsblatt. (The original is in German, this is a Google translation.)
Poorly coordinated public benefits such as the citizen’s allowance, housing benefit or child benefit often mean that additional work is not worthwhile or, in extreme cases, even leads to a drop in net income. The Ifo Institute calculated this figure for different types of households for the newspaper Handelsblatt – and showed how inefficient the system sometimes is.
..A dual-income couple with two children aged five and nine, who work full-time and each earn 2,000 euros gross per month, have a net income of 2,686 euros with rent and heating costs of 1,235 euros.
The couple therefore only has 887 euros more per month than the household receiving the citizen’s allowance. What is absurd is that if the model working couple increases their joint income to 5,000 euros, the household’s net income decreases by 43 euros to 2,643 euros.
The graph shows that from a gross monthly income of 2,000 euros ($2,150) (gray bars) to 6,000 euros ($6,450), the slope of net income (orange bars) is almost flat and, in some regions, it decreases, meaning that the couple would be better off not working.
It is difficult to resolve these problems. A negative income tax, in which benefits decline more slowly with income, could restore incentives, but at the cost of many more people receiving certain welfare benefits and a much higher budgetary cost.
