Average earners already pay the highest tax rate

An often overlooked fact from recent decades explains why Federal Finance Minister Christian Lindner (FDP) wants to reduce taxes: In 1965, Germans only paid the top tax rate when they earned 15 times their average gross income, according to the German Economic Institute. (IW) calculated. Over the years this value has decreased. Today, Germans already pay the top tax rate if they earn 1.3 times the median income.

As a result, significantly more people have fallen into the top tax rate: around one in five taxpayers currently pay the top tax rate on a portion of their income. In expensive metropolitan regions, this proportion is likely to be significantly higher. If you want to afford an apartment there, you have to earn the corresponding amount.

“This means that the maximum tax rate no longer fulfills its literal meaning, since it affects large sectors of the population,” concludes the IW. The average earner is now almost considered one of the highest earners.

However, this development does not condemn anyone to working for the tax authorities. If you want to manage your taxes sensibly, you need to know six things:

1. The average citizen continues to pay less taxes

Since reunification, the average tax rate has only fluctuated up or down by a few percentage points, despite heated discussions.

“Therefore, singles, married couples, and families do not pay more taxes relative to their income than they did a few decades ago,” the IW wrote in a 2017 analysis. Tax rates have not changed since then. The statement is as true today as it was then. “On the contrary, the percentage burden in relation to gross income is significantly below the values ​​of the 1970s, 1980s and 1990s.”

The other facts explain how the tax burden fell while people continued to pay the higher tax rate.

2. Top tax rate and input tax rate decreased significantly

In the 1980s, high earners paid 56 percent of their income to the tax office above the top tax rate. The value fell during the 1990s and has now remained constant at 42 percent since 2005. Since 2007, higher earners have also paid a rich tax rate of 45 percent.

At the same time, the input tax rate fell significantly from just under 26 percent in 1998 to 14 percent.

The difference between the top tax rate and the base tax rate today is approximately the same as in the past. But in general it is less. This reduced the tax burden for almost all Germans.

3. Increased benefits ease the burden on average earners

Basic tax relief also guarantees low taxes: it has risen by almost three quarters since 1998. This means it grew significantly faster than inflation, which only devalued money by just over half in the same period.

Many fixed tax return amounts have also increased over the years, for example for business expenses, and capital gains allowances. As a result, taxable income and average tax rates fell. Since 2021, many workers also do not have solos.

Higher tax reliefs also reduce the tax burden because taxpayers have a little more net for each euro up to the maximum tax rate: they pay less tax on the first 10,000 euros above the base tax rate than on the second 10,000 euros and so on. If Lindner increases the allocation, he raises these levels. Therefore, taxpayers have to pay a little less of each euro to the Treasury.

4. The top tax rate usually only affects a small portion of income

Many Germans feel they are paying higher and higher taxes because more and more of them are falling toward the top tax rate. This only affects a part of their small income. Many people overestimate its importance to the overall tax burden.

Even if the maximum tax rate is 42 percent, no one pays this amount on their entire income: the first 11,604 euros remain tax-free for all taxpayers. They then pay the applicable rate for each euro.

On average, even singles with a gross income of 100,000 euros pay less than 30 percent in taxes.

For people on average incomes, the basic tax relief and input tax rate are more important than the top tax rate. They determine how most Germans tax most of their income. In both cases, governments in recent decades have eased the burden on taxpayers.

5. International pressure promotes tax cuts

One of the reasons for the tax cuts in Germany is international comparison. Today, the top tax rate is in the middle range of industrialized countries. At values ​​like those of the 1980s, it would be near the top, encouraging migration of higher earners to low-tax countries.

The government wants to avoid this: according to the latest data from the Federal Statistical Office, people with incomes of up to 40,000 euros, almost two-thirds of the population, pay just over 25 percent of all taxes. People with incomes of 70,000 euros or more – only 15 percent of the population – pay almost half of all taxes. Despite the changes and reductions, high-income earners continue to bear the majority of the tax burden.

6. Higher VAT

VAT to some extent compensates for the fall in income tax: it almost doubled from ten percent in the late 1960s to 2007. It has remained constant since, except for the coronavirus pandemic.

Employees today pay less money directly to the tax office. In exchange, they pay more taxes when purchasing. Whether this is worthwhile for individual households depends on their consumption behavior.