Even Richer Tax cuts fuel German inequality

An untimely report reveals that Germany's wealthiest 10 percent are getting richer at the expense of the less well off. Researchers say lower taxes are to blame, and reform is needed to tackle the imbalance.
Quelle: dpa
Not one of the 1 percent.
(Source: dpa)

As Europe’s leading economy, you’d expect Germany to have its fair share of rich people. And indeed it does – the problem is it’s no longer a fair share. The country’s wealthy are swallowing up an increasing share of national income at the expense of the less well off, causing a higher level of inequality than among its neighbors.

According to a survey by the German Institute for Economic Research (DIW), the richest 10 percent of Germans increased their share of the national income to 40 percent, a level last seen in 1913. The share of the poorest 50 percent has halved from a third in the 1960s to just 17 percent today. The DIW says tax-cutting reforms implemented since 2000 are the reason.

The findings, which will make uncomfortable reading for Chancellor Angela Merkel as she tries to woo the center-left Social Democrats into a coalition, are based on German income tax data from the World Inequality Report 2018. It was prepared by a team led by French economist Thomas Piketty and released last month. His book, Capital in the Twenty-First Century, gained global attention three years ago, concluding that the gap between rich and poor has been growing since the 1980s.

Lawyers, managers and doctors have been among the biggest winners of income distribution since the 1980s.

Some 100 researchers sifted through mountains of data for the DIW report, compiling statistics on GDP, household income, income tax, wealth rankings and social studies going back to the start of the 20th century.

Germany has painstakingly kept such records since the creation of the German Empire in 1871, but this is the first time that income statistics were analyzed on this scale. The report shows that lawyers, managers and doctors have been among the biggest winners of income distribution since the 1980s, firmly establishing themselves in the top 10 percent in Germany.

“But the really high incomes remain confined to company owners to this day,” said DIW economist Charlotte Bartels, who wrote the German portion of the WIR 2018. The share of unearned income relative to earned income increased steadily over the past decades, from 33 percent in the 1970s to 40 percent in 2013.

Ms. Bartels explained that World War II destroyed German residential buildings and infrastructure to a far greater extent than corporate capital. As a result, once Germany started rebuilding itself, entrepreneurs enjoyed far stronger income growth than workers in the second half of the 1950s. In the 1960s, everyone started benefiting from the country’s growing prosperity as trade unions began pushing through wage hikes at a time of full employment.

The modern rift between rich and poor since reunification in 1990 widened at an accelerated pace since 2000 partly because of the growth in Germany’s low-wage sector. Nevertheless, the 17 percent share of national income earned by the poorest 50 percent is higher in absolute money terms than it was in the 1970s, meaning that people’s standard of living has increased significantly since then.

The WIR 2018 recommends tackling inequality by implementing heavily progressive tax systems, effectively reversing the tax reforms that have led to lower top tax rates in western Europe and the US since the 1980s.

Ms. Bartels added that in Germany, lower income groups should also be awarded a higher share of corporate profits.

Donata Riedel covers economic policy for Handelsblatt. To contact the author: [email protected]