Quantification of efficiency effects of income tax in Germany using tax panel data

Income taxes cause substitution effects at household level in favor of non-taxed or less taxed activities. These tax avoidance reactions are responsible for additional welfare losses on the part of the taxed, i.e. beyond the pure payment burden.

The aim of the research project is to empirically determine the extent of the additional burdens caused by the taxation of household income in the Federal Republic of Germany.

The calculations are being carried out for the first time in Germany on the basis of tax panel data. Moreover, for the first time in the German-speaking world, a concept is used that implicitly takes all tax avoidance options into account.

The intensity of tax avoidance behavior is to be calculated from the observable reaction of individual taxable incomes to an exogenous change in individual marginal tax rates, with the German income tax reforms of the second half of the 1980s serving as a natural experiment, so to speak.

Initial estimates using the differences-in-differences method led to estimates of between 0.2 and 1.4 for the elasticity of taxable income in relation to the residual rate, with households in the high income bracket in particular reacting comparatively strongly. Furthermore, taxable income reacts much more sensitively to tax rate changes than the corresponding gross or wage income of households.

The results of the project were published as IAW discussion papers no. 2, 4, 14 and 15 and presented at various conferences.

The project was carried out in cooperation with the Institute of Economics at the University of Regensburg.