Work incentives: Ifo for income tax reform and basic security

The Munich Ifo Institute proposes a reform of income tax and basic security in order to encourage more people to take up employment.

The key points are a cap on spousal splitting, increases in basic allowances, flat-rate advertising expenses and child tax allowances, an abolition of the solidarity surcharge, higher top and rich tax rates and changes to basic security, as the economic researchers announced.

“The reform would increase the number of hours worked by 184,000 full-time positions. At the same time, 172,000 people would take up employment,” expects Ifo expert Andreas Peichl. There would be no additional costs for the state budget.

Real splitting instead of spouse splitting

Specifically, the spouse splitting should be replaced by real splitting. Instead of being assessed jointly, married couples should be able to transfer taxable income up to the statutory maintenance allowance – currently 13,805 euros – to their second-earning partner.

The institute said that the cap would increase the incentives for second earners to work. It is also conceivable that this rule could be applied to all people in welfare communities.

The basic allowance should increase

According to the proposal, the basic allowance should increase by 500 to 11,408 euros, and the flat rate for advertising expenses by 200 to 1,430 euros. For the top tax rate, the Ifo suggests 44 instead of 42 percent – from a taxable income of 62,809 euros. When it comes to the tax rate for the rich, the Ifo suggests 47 percent instead of 45 percent – but only from a limit increased by around 25,000 to 302,825 euros.

“Despite the recent citizen’s benefit reform, there is still room for improvement when it comes to basic security,” said Ifo researcher Maximilian Blömer. “Further work incentives could be created, especially for single people, through which they could increase their disposable income.”