How the German tax system works

The German tax system attempts to share burdens fairly. This principle is most evident when it comes to income tax.

Income tax: what remains of your pay after tax?
Income tax: what remains of your pay after tax? mediaphotos/Getty Images

In Germany there are different kinds of taxes, such as Einkommensteuer (income tax), Gewerbesteuer (trade tax) and Umsatzsteuer (value added tax). They are the government’s most important source of revenue, which is used to fund spending for the common good – such as social security, education, healthcare and transport infrastructure. The German tax system is based on ability to pay, transparency and fairness.

Ability to pay

If you measure individuals’ ability to pay on the basis of their income, first and foremost that means people with the same income pay the same amount of tax. Differences in income then lead to differences in levels of income tax. Accordingly, people on low incomes pay little tax, while higher earners are taxed more highly.

Individuals only pay taxes if they are in a position to do so. That’s why the minimum subsistence level is not taxed – you only pay tax if you earn over 9,168 euros per year. It is not allowed to tax the minimum subsistence level for children either. The government thus grants parents an annual tax credit of 7,620 euros per child.

Fairness

The principle of equability means that taxpayers should be able to see that the types and levels of taxes they pay are fair. At best, this leads them to accept and pay their taxes.

Transparency

Everyone should be able to understand taxation laws, regulations and administration.

Income tax for (almost) all

Everyone who earns money in Germany must pay a proportion of their earnings above 9,168 euros per year to the government. This ensures that everyone pays their share towards the community. Employees have to pay income tax in the same way as pensioners or the self-employed.

Different rates of tax

A “linear progressive scale” guarantees that income tax is calculated according to people’s ability to pay. This means that the different levels in the tax scale have different tax rates: the higher people’s income is, the higher the proportion of tax in per cent they pay.

Gross and net pay

Regular tax payments are deducted from employees’ pay and recorded on their payslips; these sums represent advance instalments towards their income tax. All employees are grouped in tax classes. This makes it possible to take into account taxpayers’ individual situation – for example, whether they have no dependants or a family – when calculating tax deductions from their pay.

Employers deduct income tax and social contributions from their employees’ gross pay and pass them to the tax office before transferring the net pay to their employees. At the end of the year, taxpayers can submit a tax return to the tax office and if they have paid too much tax they will receive a refund.

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