In many Western nations, social inequality is widening, as is the gap between rich and poor. In Germany, the wealthiest ten percent of the population holds 64% of total wealth. The top 50% of the population holds 98.6% of the wealth while the bottom 50% share the remaining 1.4 %.The Gini coefficient, which describes social inequality in a country, was 0.81 in Germany in 2020. The closer this measure comes to the maximum value of 1, the more unequal a society is. Compared with other Western countries, the Gini coefficient in Germany has remained at a high level for years.
High Taxes on Labor Income, Low on Capital Gains
Why is wealth so unequally distributed in Germany? On the one hand, wealth is often inherited and thus remains “in the family.” There is a generation of heirs who are now benefiting from the successful business start-ups of the post-war period. On the other hand, over the last few decades the tax burden on earned income has been increased many times – this is one reason why it’s becoming increasingly difficult to accumulate wealth from earned income. According to the Institute of the German Economy, income tax revenues in Germany rose by 84% between 2005 and 2017, four times faster than wages and salaries grew in that period. Although the top income tax rate was reduced to 42% at the beginning of the 2000s, that top rate affects taxpayers who earn roughly twice the average gross salary among German employees.
In 1965, by comparison, only income taxpayers earning 15 times the average gross salary had to pay the top income tax rate. So today many more people pay the top tax rate than in the past. Also, even small increases in income put taxpayers into a higher tax bracket more quickly. In addition, there is the so-called wealth tax with a rate of 45%, which applies to the highest-earning employees, but not to inherited wealth.
When compared to the increase in the tax burden on earned income, taxes on wealth and capital were either left at low rates or have even been reduced. Among other things, the wealth tax was abolished and the capital gains or final withholding tax was set at a uniform 25% (plus solidarity surcharge and, if applicable, church tax, around 26%).
Consequences of Unequal Tax Treatment
This preference for capital gains over labor income, this flaw in the system, exacerbates the problem of social inequality. Why? Because even highly qualified employees in managerial positions with an annual income of 250,000 euros simply cannot, during their entire working lives, accumulate anywhere near the wealth that an heir of a double-digit million euro fortune who lives off their capital income can accumulate.
There is simply no rational justification for the unequal tax treatment of investment income versus earned income. The flat tax, for example, could even be unconstitutional for this reason – at least that’s what a legal expert opinion suggests. In a social market economy that seeks to achieve a balance, we should be careful not to allow the kind of social imbalance that patronage politics has already created on tax issues. In the long run, social inequality leads to major social problems, as has been witnessed already in many countries. We do not want to see ghettos of the rich with high fences and armed security, as in South Africa and Brazil. Or that some neighborhoods can no longer be entered because they are too dangerous.
Facilitating Social Advancement
Our society can only function if social advancement is facilitated by the system, for example through performance-based taxation. One’s standard of living should be determined primarily by one’s own value contribution and one’s own performance. The “social contract” can only be maintained if everyone is included and believes it’s worthwhile to contribute something to society. Only then, for example, can we motivate younger people from less privileged social backgrounds to play a constructive role in building and maintaining society. We must not only look at ourselves, at our advantages, but must also constantly look at the bigger picture: How we want to live together as a society in the future.