Abolishing Tax Classes and Other Reforms Could Create 1.2 Million Full-Time Jobs

The decision just made to abolish tax classes 3 and 5 while retaining marital splitting could create 67,000 new full-time jobs in Germany. Overall, more than 1.2 million full-time jobs could be filled through reforms to the tax and social security system. Due to disincentives, especially for women and older people, there is still considerable untapped employment potential, according to calculations by the ifo Institute for the Chamber of Industry and Commerce in Munich and Upper Bavaria. “The tax and contribution system in Germany can definitely be restructured to alleviate the labor shortage,” says Volker Meier from the ifo Center for Labor and Demographic Economics, one of the authors of the study.

Shifting from marital splitting to family splitting would prompt an increase in employment of around 200,000 full-time jobs in Germany, and the end of the non-contributory co-insurance of spouses in statutory health and long-term care insurance bring another 150,000 full-time employees into employment. Higher pension deductions for early retirees would increase employment by the equivalent of 180,000 full-time employees. According to ifo, a 0.5 percent pension deduction is actuarially justified for each month of early retirement. Only 0.3 percent of the pension is currently deducted.

“In view of population aging and the labor shortage, our tax and social security system must consistently reward gainful employment. Every employment incentive counts: Whether it’s starting work, working a few more hours a week part-time, or working longer because it’s more attractive up to retirement – every extra hour worked per week counts. Corresponding reforms would also make an important contribution to greater fairness among all tax and contribution payers and between the generations. However, the fact also remains that the tax and contribution burden for employees in Germany is generally too high,” says IHK CEO Manfred Gößl.

The ifo Institute has also calculated that more childcare (400,000 additional places) would mean an increase in employment of 58,000 full-time jobs. The effect could be boosted even further if the childcare places were created primarily in regions with shortages. According to ifo, these are mainly the major cities in western Germany.

Raising the statutory retirement age from 67 to 69 would even result in an additional 473,000 full-time employees. Abolishing retirement at 63 would mean an increase of 157,000 full-time employees.

The conversion to full-time employees serves as a mathematical figure for a simpler comparison of the employment effects. It does, however, also include part-time employees increasing their hours, and people taking on part-time jobs. According to the ifo economists, Bavaria would account for a good sixth of the employment gains mentioned.