Germany’s income-splitting tax rule for married couples is unfair to childless couples and the country should consider moving toward France’s system of conferring benefits on a family-wide basis, according to a prominent German economist.
In Germany, married couples filing joint returns use the applicable tax rate for half of their combined incomes and then double the resulting amount to determine their tax liabilities. Because of the country’s progressive tax rate structure, spouses with significantly different incomes often pay a lower combined rate of tax as a couple than they would if each earned roughly comparable amounts and filed separately. That discourages the lower wage earner, who is much more likely to be a woman, from working more hours — if any at all — because the marginal tax rate on the additional income would be higher, said Andreas Peichl, director of the ifo Center for Macroeconomics and Surveys.
Peichl contrasted the German system with the treatment of joint filers under the U.S. Internal Revenue Code. “In contrast to the U.S. system, where you can have either a marriage bonus or penalty when filing jointly due to different tax schedules for singles versus couples filing jointly, in the German system there is always a bonus for being married,” he said. “The reason is Germany’s unique tax schedule of constantly increasing marginal tax rates, together with the income-splitting rule.”
Peichl said Germany would be better off adapting the French system, which splits income based on the total number of family members. “In the French system, the splitting factor . . . depends on the number of children,” he told Tax Notes. “A model more in line with the French system of family taxation would offer a greater financial incentive for the second earner to work more. For example, it could reduce the differences in income between men and women. At the moment, the German tax system penalizes the wife’s work.”
In its 2012 economic survey of Germany, the OECD said one alternative that would comply with constitutional provisions — specifically, that married couples should not be at a disadvantage to unmarried ones and that an equal share of total household earnings belongs to each spouse — would be to allow interspousal transfers of income up to a specified amount through a system of limited real income splitting referred to as “realsplitting.”
The French methodology shouldn’t be introduced unchanged, Peichl said. “Such a system would be more costly for the government if introduced in the current system of income splitting,” he said.
Realsplitting income would limit the maximum tax advantages for couples while at the same time generating more revenues for the government than under the current system, Peichl said. “Taken together, family realsplitting would increase the incentives for women to work without incurring further costs or revenues,” he said. “In addition, we increase tax incentives for having children.” It would also help address the country’s shortage of skilled workers, he said.
France has one of the highest birth rates per woman in the EU, while Germany has one of the lowest. According to Eurostat, the statistical office of the EU, the average French woman in 2017 was expected to have 1.9 children during her lifetime while her German counterpart would have 1.57 children.