Transparent deductions from income tax instead of tax brackets
Monthly income tax deductions (monthly income tax withholding) must be transparent. This is the only way to make it clear to employees what their actual net income is from their work. Taxing secondary employment under income tax bracket VI and taxing the lower income under the joint taxation of spouses under tax bracket V gives the impression that these activities are subject to particularly high taxation. This reduces the willingness to take on such employment.
This impression is incorrect. The actual taxation is based on the annual income. This applies to a person with two jobs and equally to those who are jointly assessed under the joint taxation system for married couples. A uniform tax rate is calculated for the total annual income.
The income tax classes are not relevant for the actual taxation. They are only decisive for the monthly income tax deduction, i.e. the advance payments. The annual income tax return then compensates for any differences between the advance payments and the actual tax burden. In the case of secondary employment subject to tax class VI, this leads to substantial refunds. In the case of joint taxation of spouses, the income tax to be paid jointly was distributed across very unequal advance payments.
This creates a false impression of the taxation of activities that are subject to the same tax rate in the annual income tax return. The income tax classes suggest different taxation. The actual taxation and the actual individual net income only become clear with a considerable time delay after the income tax return. The relationship between advance payments and refunds is probably not very well known. As a result, decisions about whether a spouse should take up employment or take on a second job are made on the basis of false assumptions. The false impression of taxation through income tax classes is likely to discourage people from taking up employment, which should be avoided in view of the shortage of skilled workers.
The problem of this false impression of high taxation of second income for jointly assessed persons or second jobs can be avoided by abolishing tax classes and replacing them with the factor method. The factor method is already used on application for the taxation of jointly assessed communities (marriages and registered partnerships). This method calculates the expected income tax relatively accurately on the basis of actual income, and both incomes are taxed at this rate in the monthly wage tax deduction.1 In this way, the actual taxation is already visible in the monthly payment made by the employer. In future, the factor method should be applied as a matter of principle to jointly assessed persons and in the case of second jobs. Tax classes are no longer used as an instrument for calculating income tax deductions.2
Indications of an employment barrier due to tax brackets
There is no direct evidence that tax brackets discourage people from taking up employment or second jobs. However, there are a number of indications that this is the case.
Second jobs have increased significantly over a longer period of time. In 1993, 1.7 percent of the working population had a second job. This proportion rose to 5.3 percent by 2018, but fell slightly to 4.5 percent in connection with the Covid pandemic. About a quarter of these jobs are self-employed, the rest are salaried positions.3
With the different tax rates for married couples (tax classes III and V), it is assumed that those who earn less (often women) decide against taking on more extensive employment due to the higher monthly income tax deductions in tax class V. This is the argument put forward, for example, in a paper by the Federal Ministry for the Environment and Climate Protection.4 The report by the Scientific Advisory Board to the Federal Ministry of Finance makes a similar argument: "In contrast, the second earner has a significantly higher deduction on their payslip [compared to the first earner]. It can therefore be assumed that the tax implications of the splitting procedure are so salient that taxpayers are well aware of the difference in the burden and react accordingly."5 This effect is seen as influencing the very different labour force participation rates of women and men. This type of perception effect should also apply to the taxation of second jobs.
Another indication is the proportion of second jobs that opt for a mini-job with a very low income tax deduction. The majority of second jobs are low-paid employment relationships.6 Based on the Socio-Economic Panel, Roschan, Schäfer and Schmidt determine that 79 per cent of employees with a second job are engaged in mini-jobs.7 At the same time, this is a group with a comparatively low income, and as many as 29 per cent of people with a second job would like to work more. This proportion is significantly higher than for people with only one job (ibid.). Thus, there appears to be a need for more employment in this group. Whether the structure of taxation is a significant factor deterring people from expanding their secondary employment cannot be determined from the available data, but it would be very plausible.
Communicate clearly, strengthen prosperity and justice
The monthly income tax deduction is more than just an advance payment on income tax. With the monthly wage deduction, the state communicates how much income tax it intends to deduct from the gross salary. People also base their decisions on how and to what extent they work on this information. This makes it all the more important to inform people as accurately as possible about the deductions they can expect. The monthly wage deduction for jointly assessed persons in tax class V and for secondary employment in tax class VI does not meet this requirement.
This widespread misconception has consequences. People who would basically like to work and earn more income refrain from doing so because they believe that they would have hardly anything left of their gross income. The abolition of tax classes serves to counter this misperception. Given the shortage of skilled workers, it is a significant problem to discourage people from taking up or expanding employment due to excessive monthly wage deductions. In order to strengthen social and individual prosperity, it makes sense to abolish tax brackets and transfer income tax deductions to the factor method. In terms of perceived fairness in the taxation of unequally high incomes, it is a simple and necessary measure.
1 This does not affect the declaration of special circumstances in the annual income tax return.
2 There has already been a proposal to transfer tax classes III and V to the factor method. See Bundestagsdrucksache BT-Drucksache 20/12778, https://dip.bundestag.de/vorgang/gesetz-zur-fortentwicklung-des-steuerrechts-und-zur-anpassung-des-einkommensteuertarifs/314887 (last access 24.04.2025). The equally important transfer of tax class VI to the factor method was overlooked.
3 Data from the Statistisches Bundesamt destatis. https://www.destatis.de/DE/Themen/Arbeit/Arbeitsmarkt/Qualitaet-Arbeit/Dimension-3/zweitjobl.html#:~:text=Anstieg%20der%20Zweitjobquote,in%20mindestens%20einem%20weiteren%20Arbeitsverh%C3%A4ltnis (last access 24.04.2025).
4 Bundesministerium für Wirtschaft und Klimaschutz (BMWK), 2024: Wachstumsinitiative – neue wirtschaftliche Dynamik für Deutschland. P. 13. https://www.bundesregierung.de/resource/blob/975228/2297962/ab6633b012bf78494426012fd616e828/2024-07-08-wachstumsinitiative-data.pdf?download=1 (last access 24.04.2025).
5 Bundesministerium der Finanzen, 2018: Zur Reform der Besteuerung von Ehegatten. Gutachten des Wissenschaftlichen Beirats beim Bundesministerium der Finanzen. 02/2018. P. 20. https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Ministerium/Geschaeftsbereich/Wissenschaftlicher_Beirat/Gutachten_und_Stellungnahmen/Ausgewaehlte_Texte/2018-09-27-Gutachten-Besteuerung-von-Ehegatten-anlage.pdf?__blob=publicationFile&v=1 (last access 24.04.2025).
6 Bundesagentur für Arbeit, 2018, Sozialversicherungspflichtig Beschäftigte mit geringfügig entlohntem Nebenjob. Arbeitsmarkt kompakt, Mai 2018, P. 5. https://www.arbeitsagentur.de/datei/arbeitsmarkt-kompakt_ba037804.pdf (last access 24.04.2025).
7 Roschan, Monsef/Schäfer, Holger/Schmidt, Jörg, 2021: Der Trend zur Zweitbeschäftigung: Nur eine Frage des Geldes? IW-Trends. Institut der deutschen Wirtschaft (IW) Köln, Band 48(2), 45–67. Quote P. 52. https://www.iwkoeln.de/studien/roschan-pourkhataei-monsef-holger-schaefer-joerg-schmidt-der-trend-zur-zweitbeschaeftigung-nur-eine-frage-des-geldes-508172.html (last access 24.04.2025).
