Taxation and Social Inequality in Germany: Fiscal Constraints and Redistribution Dynamics

Abstract

Germany has one of the largest welfare states of the advanced industrial countries, and also has one of the highest tax burden relative to the GDP. Although with such fiscal strength, Germany has had high and growing income and wealth inequalities as an important characteristic of its political economy. This paper will examine how well the German tax system mitigates/reproduces social inequality through an examination of political economy, fiscal structure, distributional results, and political narratives to better explain how the high level of aggregate taxation exists with limited wealth redistribution in Germany; analysis will involve information obtained from OECD fiscal datasets, World Inequality Database estimates, IMF fiscal studies, and the current comparative political economy literature. The analysis demonstrates that the German tax system has a highly progressive tax structure with large amounts of income tax being levied against wage earners, but due to the structural constraints placed upon it by the predominance of revenue sources being from labour, along with minimal taxation of wealth and capital (as well as being given large amounts of tax exemptions when receiving inheritance), there remains a continuing dual distribution gap between income inequality and wealth inequality. This article will add to the existing debates surrounding fiscal justice in coordinated market economies by demonstrating how the rational design of institutions and political constraints impact redistributive capacity within larger-capacity welfare states.