Slowly there is movement in the overdue reform efforts Federal Government. After the “autumn of reforms” failed to materialize, the Federal Chancellor and Finance Minister have now once again announced major projects. After the changes to citizens’ benefit, income tax, VAT, spouse splitting and pensions are at the center of the debate. This is initially good news. What is crucial, however, is the implementation: these reforms must make economic sense and must not continue the redistribution from young to old and from poor to rich, as the pension guarantee passed in December does.
The government’s goals are enormous: to relieve the burden on people with small and medium incomes, enable more employment and at the same time close a huge financing gap. This will probably be at least 30 billion euros annually in the coming years, but it could be significantly higher due to the aid necessary in this energy crisis. Closing this gap would be ambitious even under favorable conditions. After the full-bodied campaign promises of SPD and Union, it is certainly a political show of strength.
There is a risk of redistribution from the bottom to the middle
Above all, a reform of the income tax is being discussed: less burden on the social middle and a later, higher top tax rate. This would relieve the burden on many middle income earners and put a greater burden on high income earners. The only catch is that such a reform costs money. According to calculations by my DIW colleague Stefan Bach It could cost the state almost 15 billion euros per year. The financing gap would initially increase, not decrease.
That’s why the focus is now on VAT in order to close the large financing gap. Every additional percentage point in the regular rate brings the state almost 16 billion euros per year. An increase from 19 to 22 percent could bring almost 48 billion euros into the coffers.
However, a higher VAT would be a social mistake. It hits people with low incomes particularly hard, who often have to spend almost their entire income on consumption. If this measure were to finance the income tax reform, there would be a double shift: from the top to the middle and from the bottom also to the middle. In addition, in an already weak economic phase, a higher VAT would dampen consumption and thus place additional strain on the economy.
More employment for women also strengthens public finances
The reform of the welfare state also includes the debate about splitting between spouses, non-contributory co-insurance for spouses in statutory health insurance and mini-jobs. Spousal splitting, one of the CDU/CSU’s sacred cows, costs the state more than 20 billion euros in reduced tax revenue every year. For constitutional reasons, it can hardly be completely abolished. But it could very well be reformed. Together with changes in mini-jobs and co-insurance, which tend to give the SPD a stomach ache, this could result in significant employment effects.
Women in particular would benefit from this: through better employment opportunities, higher income and more security in old age or after separation. At the same time, considerable economic potential would be raised. More employment not only strengthens companies, but also public finances.