Ifo Institute: More net income for low paid jobs in Germany

This is the press release for German Ifo Institute:

The Ifo Institute wants to reform the German system of social benefits. "Those affected must be able to escape the trap of low incomes. That's why we want to improve incentives to work more. Unfortunately, the system is currently built in such a way that more gross sometimes means less net income. But more work must be worth it," says Andreas Peichl, head of the Ifo Centre for Macroeconomics and Surveys. "We propose reducing the marginal tax burden for low incomes above 630 euros per month to 60 percent," says Ifo President Clemens Fuest. "Our current system is harmful because it punishes effort where it is particularly valuable: where people want to escape dependency on social benefits through their own work. Our Ifo proposal would increase employment by 216,000 full-time jobs, reduce income inequality and even slightly relieve the government budget. Above all, transfer recipients with children will be placed in a much better position. The allowance for own assets of transfer recipients is increased and tied to the employment biography."

Peichl explains: "We have the highest marginal tax burden of additional income in the basic provision. Hartz IV recipients are charged implicit marginal rates of 80 to 100 percent. That is absurd. With children and single parents, in particular, it can even happen that more gross income leads to less net income. Then why should anyone work more?" 

Peichl adds: "Especially in the current labor market situation in Germany, people who want to work more have good chances of finding employment. A reform that leads to more employment and higher disposable incomes among recipients of benefits would reduce income inequality in Germany and increase overall economic production - it would be efficient and equitable.“