The German welfare state is generous but this leads to unclear tax rates for those on welfare which can exceed 100%. Here is a helpful summary from the German newspaper Handelsblatt. (The original is in German, this is a Google translation.)
Poorly structured state benefits such as citizen’s allowance, housing benefit or child benefit often mean that the extra work is not worth it or, in the worst cases, even leads to gross income. The Ifo Institute calculated this in different types of households for the Handelsblatt newspaper – and showed how the system is sometimes counterproductive.
.. A two-income couple with two children aged five and nine, who work full-time and each of them earns 2000 euros per month, has a net income of 2686 euros with rent and heating costs of 1235 euros.
So the couple has only 887 euros per month than the family that receives the citizen’s allowance. The absurd thing is that if the model working couple increases their joint income to 5,000 euros, the family income drops by 43 euros to 2,643.
The graph shows that from a monthly gross income of 2000 Euro ($2150) (gray bars) to 6000 Euro ($6450) the average net income (orange bars) is almost flat and in some regions it falls—meaning that the couple will be better off . without working.
It is difficult to solve these problems. A negative income tax where benefits will gradually decrease with income can restore benefits but at the price of having many more people on certain welfare and very high budget costs.
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