How does the German tax system work?

Factual Questions
1

I was having a discussion on another board wherein a poster was trying to decide between his current job and one with a potential $20k raise. Another poster, who I will call Hans for reasons that will soon become evident, said that might not be a good idea, because he might end up in a higher tax bracket and end up making less money overall after the raise.

I chimed in to say that graduated tax rates in the US don’t work that way. Hans responded by saying he was from Germany, and there were situations where his taxes were over 100%. Being the skeptical person I am, I went to wikipedia where I found the highest federal tax rate is 45%. Upon pointing this out, he claimed the real culprit was the social insurance fees, which screw over poor people.

He claimed that, if you make no income, the government will charge you 1920 Euro for social insurance (which makes no sense, why would you be charged when you have no income?). However, if you do make money, even 1 Euro, your insurance taxes go up to 4200 Euro, thereby causing a 420,000% tax rate.

Skeptical I was again, but he wasn’t finished.

He later claimed that he got a scholarship from the government for university, but if he earned any money at a part time job, that salary would be deducted from his scholarship money, thereby causing a 100% tax rate.

I am now incredulous, but he’s not finished.

Apparently as a student you get a waiver on the social insurance, but if you pick up a part time job, not only do you lose that scholarship, but you’ll start getting charged the social insurance, for a tax rate above 100%.

I declined to press for more details because what I was getting just seemed ludicrous to me. But, I hope it was just a language barrier question (or a particularly confused Hans). Do any Dopers have a good explanation for how the German tax system (and mandatory insurance) work? And as a bonus, how do scholarships figure into this? I did skim the Wikipedia article on German taxes, and it seemed like a standard “federal rate, state rate, and local rate” system, with a graduated set of brackets.

2

It strikes me that Hans was talking about situations where he was going from no income to very little income or similar. There are similar situations in NZ where a person receiving an unemployment benefit payment can do part time work but the benefit payment drops by 80 cents for every dollar earnt. Take a minimum tax rate of 14% and you are effectively on 94% tax for earnings up to about $200 a week, at which point you’d lose the unemployment benefit completely. These are only rough figure guesses, not exact amounts.

In no real world would taking a $20k rise on a salary of average or higher income mean a drop in income.

3

Hans’ logic is dubious. He’s apparently counting the money he gets from the government as income so if the government reduces the amount of money it gives him, he counts that as a tax.

That’s why he can argue that if the government reduces his scholarship grant, he’s being “taxed”. But that isn’t true - the government isn’t taking more money from him, it’s just giving less money to him.

There’s also apparently some flat tax that everyone pays for “social insurance”. People with no income are supposed to pay €1920 (but Hans has a student deferment) and people with an income are supposed to pay €4200. So Hans is arguing that if he has an income of €1, he’d lose his deferment and he’d be getting taxed at 420000% of his income.

The obvious rebuttal is nobody is going to have an income of €1 (which is about US$1.36). Pretty much anyone who has any income is going to have an income above €4200 (US$5704) so they actually would be taking money home and making more than an income of zero.

4

Germany doesn’t have a general minimum wage. Apparently minimum legal wages are determined by the court system based on occupation so what might be a legal wage in one job would be illegally low in another.

But for the sake of argument, let’s apply the American minimum wage (US$15,080 based on a forty hour week) and convert that to its equivalent of €11,100. So for a German working a hypothetical minimum wage job, the social insurance tax of €4200 would represent 37.8% of his income.

5

From a ‘should I take a job that earns $X’ standpoint a reduction in government benefits seems functionally the same as a tax. Both will reduce the net benefit from the potential job.

I’d think most modern governments would be smart enough not to allow such crazy step functions in the tax/benefits rules so it seems more likely that Hans is misunderstanding something. I know plenty of people that don’t understand how marginal tax rates work.

6

It’s true that other factors can cause a higher income to actually give you less money. For example, if you have a job you can work from home then a higher paying job that requires you to commute and pay for daycare for your kids might be less actual money. But you don’t call commuting and daycare costs taxes.

7

Efficiently.

8

From an economics perspective, Han is using correct reasoning. You are implicitly injecting a moral judgement here - taking money from the government is wrong - to create a distinction. Taking money from the government probably is morally wrong, but it doesn’t mean this kind of decision making won’t affect behavior.

9

Where are you getting the implied moral judgement from? I certainly didn’t put it there.

Suppose I bring a box of donuts in to work every Friday. Then I go on vacation so I don’t bring donuts in for two weeks. Did I steal two boxes of donuts from work? Or by bringing in a box of donuts one day a week, am I taking a box of donuts the other four days of the work week? If I’m taking four boxes of donuts each week and only bring in one, where are all those extra donuts accumulating? If I bring in ten boxes on Friday, do I get forty boxes the other days? Can I open a shop to sell all those donuts? What happens if my donut shop is so successful that I quit my day job - does my supply of donuts disappear?

10

You were correct. All else equal more income before taxes never results in less income after taxes, although a surprising number of people believes that. His social security contributions and student benefits may be part of his personal calculations, but of course they not really part of the tax system.

I don’t know all the relevant numbers and regulations for that, but he isn’t talking about dependents, the officially unemployed, welfare recipients etc. but people living on unspecified mystery money. Everybody is required to have health and long term care insurance one way or the other. If you don’t have any income, aren’t covered by anybody else’s insurance and aren’t eligible for any benefits (e.g. because you are living on the cash from your mattress) then you have to buy it at an income-independent rate.

If he is receiving what I think he is receiving, then ‘scholarship’ is a slightly misleading. It’s closer to a very favorable public student loan scheme. It’s only supposed to cover whatever part of a living income he and potentially his parents can’t afford. It’s true that everything above a relatively low limit is deducted, but that is very much by design. Of course that is stretching the definition of a tax even further than the social insurance issue.

Yes, as a student with only very limited income you get health insurance at a significantly reduced rate.

The short version of all this is that he isn’t sure if it makes sense to ‘waste’ the preferential treatment he can get as a student by getting a normal job.

11

German, working and having studies in Germany. Hans is talking out of his ass (except for a very tortured ).

University student, not working:

  • medical + nursing insurance premium: 78,50 €/month (if you have no kids - for students who are parents it is 77.01 €)
  • no pension insurance premium
  • eligible for a cost of living stipend (BAFöG) assessed at (670 € month) - (parental & own income minus certain deductions).
  • no tuition (at public universitites which are the rule - some private universities take tuition)

University student, working in a minimum job (< 450 €/month)

  • the same as above applies (medical insurance as per above, exempt from pension insurance as a student).
  • for BaFöG : net earnings from the job (above a deduction of 1000 €/year) are deducted from the BAFög entitlement
  • no tuition, as above

University student, working more (> 450 €/month) but less than 20 hr/week

  • the same as for the minimum job applies
  • medical insurance as above i.e. 78.50/77.01 €/month)
  • normal income tax is due above 8354 €/year, standard deduction for employees 1000 €/year, starting at 14 % for income exceeding 9354 €/year
  • pension insurance due at 18.9 % (employers bays half, i.e. employee pays 9.45 % of income)
  • for BaFöG : net earnings from the job (above a deduction of 1000 €/year) are deducted from the BAFög entitlement
  • no tuition, as above

So there are corner cases where an university student with low-income parents but earning a lot in a part-time job himself will have any additional euro earned in net income (i.e. after income tax and pension insurance) deduced from the BAFöG stipend. The only benefit from the additional euro earned, in this case is in an additional pension entitlement. As soon as the BAFöG due drops to zero, of course, the net benefit is the net additional income. These corner cases seem not to matter much - I dn’t see them cropping up in public debate.

The 1920 € in social insurance for people with no income is bullshit. People with no income get a cost of living stipend, plus rent cost (for a reasonably-sized apartment), are medically insured at the cost of the state and pay no pension insurance. Any income, after certain deductions, is deduced from the cost of living stipend.

In don’t see where he gets the 4200 €/year social insurance payment either.

12

In australia, $1 (or part there of ! ) can cost $700.
However, it occurs when you go over a threshold of around $70K … So its unlikely anyone would refuse a payrise.

Here’s a calculator to explain the tax system of Deutchland. ( Not sure if you meant every country that speaks a germanic language, or what )

http://www.parmentier.de/steuer/steuer.htm?wagetax.htm

13

I see that the Deutchland 8% social security tax kicks in when a person earns above 400 Euro a Month.

E400 a month ? 0 Euro social security tax
E401 a month ? 33 Euro social security tax
That 1 Euro costs 33 Euro’s , or 3300 %

14

Thanks for the responses all - Mops and Kellner were especially clear. I had a feeling Hans was wildly misstating things, but it’s always nice to get an explanation from an unbiased source.

15

What Mops said…… Hans is talking out of his ass….

First of all, you can NOT pay more than 100% tax… since this would mean that you do not earn anything.

Where do you get your figures from? Regarding the German wages taxation, you can never earn less after a wages increase. Here a cite.

Also, regarding this Cite, the tax threshold in 2012 was €8004 per year (equal to €667 month).

Regarding this Cite, in 2013 the tax theshold is €8.130.

Also 3300% of €401 is more like €13.233 - I am not sure, how you can pay €13.233 tax on a €401 wage :smack: