Why is Tax in Germany So High

Why Is Tax in Germany So High: A Guide For Foreigners and Newcomers

The reason that tax in Germany is so high is to fund its comprehensive social welfare system, high-quality public services, and a progressive income tax structure. These taxes support universal healthcare, education, infrastructure, and social benefits, contributing to a high standard of living.

Any foreigner or newcomer to Germany is often taken aback when they discover the extent of the taxes they are required to pay. The tax burden in Germany is notably high, and many people are not fully aware of the reasons behind this. In this article, we will demystify the tax in Germany, providing a comprehensive explanation of the various tax obligations you will encounter.

• We will delve into the everyday taxes that impact your daily purchases and household expenses. Germany imposes a Value-Added Tax (VAT) on most goods and services, which affects how much you pay when shopping or dining out. This tax, set at a standard rate of 19% and a reduced rate of 7% for certain items, can significantly influence your cost of living.
• Next, we will explore the income taxes you are required to pay. Germany’s progressive income tax system means that the more you earn, the higher your tax rate. We will break down how much of your income will be subject to taxation, including details on the various tax brackets and how your earnings are taxed at different rates.
• Additionally, we will discuss the contributions you make to Germany’s social welfare system. These contributions fund essential services such as healthcare, pensions, and unemployment benefits. Understanding how much of your income is allocated to these social programs will provide insight into the overall tax burden you face.
• Finally, we will address a crucial question: if you come to Germany and start paying a substantial portion of your income towards social welfare, how much of this money can you expect to recover or benefit from in the future? We will examine the return on investment in terms of social benefits and what you can anticipate receiving in exchange for your contributions.

By the end of this article, you will have a clearer understanding of Germany’s tax system, including the reasons behind the high tax rates and how these funds are utilized. This knowledge will help you better navigate your financial responsibilities and appreciate the benefits provided by the German welfare system.

Where My Tax in Germany Goes?!

Most of the tax you pay in Germany goes towards social welfare, public services, income tax, solidarity surcharges, VAT, public spending, and stability and redistribution. For individuals, these taxes are essential to funding the country’s comprehensive social safety nets and public infrastructure. If you run a business, additional taxes will apply, but this article focuses specifically on the taxes that individuals must pay.

1. Comprehensive Social Welfare System

• Social Security Contributions: Germany has a robust social security system that includes health insurance, pension schemes, unemployment benefits, and long-term care insurance. These contributions are funded by taxes and payroll deductions, which can be substantial.
• Generous Benefits: The country provides extensive social benefits, including universal healthcare, generous family allowances, and unemployment support. To fund these benefits, the government relies on higher taxes.

2. High Quality of Public Services

• Healthcare: Germany offers a high-quality, universal healthcare system that covers a broad range of medical services. The cost of maintaining such a system requires significant funding through taxes.
• Education: Public education, including primary, secondary, and tertiary education, is largely funded by taxes. The emphasis on providing free or low-cost education contributes to the overall tax burden.
• Infrastructure: Maintaining and developing infrastructure, such as transportation networks, public utilities, and urban amenities, requires substantial investment funded through taxes.

3. Progressive Tax System

• Income Tax Rates: Germany employs a progressive income tax system where higher income levels are taxed at higher rates.
• Solidarity Surcharge: In addition to income tax, there is a solidarity surcharge which was initially introduced to fund the reunification of East and West Germany. Although its necessity has been debated, it remains part of the tax structure.

4. High VAT Rates

• Value-Added Tax (VAT): Germany has a relatively high VAT rate. VAT is a significant source of revenue for the government, impacting the overall tax burden on consumers.

5. High Public Spending

• Social and Economic Policies: Germany invests heavily in social and economic policies aimed at ensuring a high standard of living, reducing inequality, and supporting economic stability. These investments require substantial funding from tax revenues.
• Public Sector Employment: Germany has a large public sector, including various government agencies and public institutions. The cost of maintaining a significant public workforce is funded through taxes.

6. Economic Stability and Redistribution

• Economic Stability: High taxes contribute to economic stability by ensuring adequate funding for public services and social programs, which can help mitigate economic fluctuations and support overall economic health.
• Redistribution: Germany’s tax system is designed to redistribute wealth and reduce income inequality. Higher taxes on higher incomes help fund social programs that benefit lower-income individuals and families.

What Percentage of Tax Should You Pay in Germany Overall?

Tax in Germany: Social Welfare System

In Germany, the percentage of income that a person contributes to the Social Welfare System is primarily determined by various social insurance contributions. These contributions are typically split between the employee and the employer, with the total rate often being around 40-45% of gross income when combining all social insurance categories. Here’s a breakdown of these contributions:

1. Pension Insurance (Rentenversicherung):

• • Rate: Approximately 18.6% of gross income.
  • Contribution Split: 9.3% paid by the employee and 9.3% paid by the employer.

Check there official website for more information.

2. Health Insurance (Krankenversicherung):

• • Rate: Approximately 14.6% of gross income.
  • Contribution Split: 7.3% paid by the employee and 7.3% paid by the employer.
  • Additional Contribution: Depending on the health insurance provider, there might be an additional contribution rate, averaging around 1.3% (0.65% paid by the employee and 0.65% paid by the employer).

3. Long-Term Care Insurance (Pflegeversicherung):

• • Rate: Approximately 3.05% of gross income.
  • Contribution Split: 1.525% paid by the employee and 1.525% paid by the employer.
  • Additional Rate for Childless Employees: An additional 0.35% is paid by employees without children.

4. Unemployment Insurance (Arbeitslosenversicherung):

• • Rate: Approximately 2.4% of gross income.
  • Contribution Split: 1.2% paid by the employee and 1.2% paid by the employer.

5. Solidarity Surcharge (Solidaritätszuschlag):

• • Rate: 5.5% of the income tax amount. This is not a direct percentage of gross income but is an additional charge on income tax.

Overall Contribution Summary:

• • Employee Contribution: Typically around 18-20% of gross income when combining pension, health, long-term care, and unemployment insurance contributions.
  • Employer Contribution: Another similar percentage, effectively doubling the total social insurance contribution rate to around 40-45% of gross income.

Tax In Germany: Value-Added Tax

In Germany, the Value-Added Tax (VAT) is generally applied to most goods and services at a standard rate of 19%, with a reduced rate of 7% for certain items. However, there are specific items and services that are exempt from VAT or outside the scope of VAT.

1. VAT-Exempt Goods and Services

1. 1. Financial Services
      • Examples: Banking services, insurance premiums, and financial transactions such as loans and securities trading.
      • Reason: These services are exempt to avoid tax cascading and complexity in the financial sector.
   2. Medical Services
      • Examples: Medical care provided by doctors, dentists, and hospitals.
      • Reason: To keep healthcare affordable and accessible, medical services are exempt from VAT.
   3. Education and Training
      • Examples: Public and private school tuition, university courses, and vocational training.
      • Reason: Education is exempt to promote accessibility and affordability of learning opportunities.
   4. Cultural Services
      • Examples: Admission to museums, theaters, and concert halls, as well as the sale of books and certain periodicals.
      • Reason: Cultural services are exempt to encourage cultural participation and support the arts.
   5. Rent for Residential Property
      • Examples: Monthly rent for apartments and houses used for residential purposes.
      • Reason: To make housing more affordable, residential rent is exempt from VAT.
   6. Public Transportation
      • Examples: Bus, tram, and local train fares.
      • Reason: To support public transport and ensure affordable mobility for residents.
   7. Certain Non-Profit Activities
      • Examples: Activities of non-profit organizations that are not carried out for commercial purposes.
      • Reason: Non-profit organizations may be exempt to support charitable and community services.

2. VAT Reduced Rate Items

1. 1. Food
      • Rate: 7% reduced VAT rate.
      • Examples: Groceries, bread, milk, and non-alcoholic beverages.
      • Reason: The reduced rate is aimed at making basic food items more affordable for consumers.
   2. Books and Newspapers
      • Rate: 7% reduced VAT rate.
      • Examples: Printed books, newspapers, and magazines.
      • Reason: To support literacy and access to information.
   3. Medical Products
      • Rate: 7% reduced VAT rate.
      • Examples: Prescription medications and certain medical devices.
      • Reason: To reduce the cost of essential health products.

3. VAT Exemptions for International Trade

1. 1. Exports
      • Rate: 0% VAT.
      • Examples: Goods and services exported outside the European Union (EU).
      • Reason: To prevent double taxation and encourage international trade.
   2. Intra-Community Supplies
      • Rate: 0% VAT.
      • Examples: Goods sold to other EU countries.
      • Reason: To facilitate trade within the EU and avoid tax barriers between member states.

Tax in Germany on Salary (Income)

1. Tax-Free Allowance (Grundfreibetrag)
   • Amount: €11,604 for singles and €23,208 for married couples or registered partners.
   • Description: The first €11,604 of an individual’s income is tax-free. This allowance is designed to ensure that basic living expenses are not taxed.
2. Progressive Tax Rates
   • Income from €11,604 to €20,400
     • Tax Rate: 14% to 24% (Progressively applied within this range).
     • Description: For income above the tax-free allowance, a progressive rate starts at 14% and increases up to 24% as income rises within this bracket.
   • Income from €20,400 to €60,000
     • Tax Rate: 24% to 42% (Progressively applied within this range).
     • Description: As income increases, the rate progresses from 24% up to 42% within this range.
   • Income from €60,000 to €277,825
     • Tax Rate: 42%
     • Description: Income within this bracket is taxed at a flat rate of 42%.
   • Income above €277,825
     • Tax Rate: 45%
     • Description: High-income earners pay the top marginal rate of 45% on income exceeding €277,825.

Additional Taxes and Contributions

1. Solidarity Surcharge (Solidaritätszuschlag)
   • Rate: 5.5% of the income tax amount.
   • Description: This surcharge was initially introduced to fund the reunification of East and West Germany. Although its necessity has been debated, it remains part of the tax structure. Note that the solidarity surcharge has been partially abolished for most taxpayers with lower income levels as of 2021.
2. Church Tax (Kirchensteuer)
   • Rate: 8% to 9% of the income tax amount.
   • Description: This tax applies to members of certain religious communities, such as the Catholic and Protestant churches. The rate varies by region (8% in Bavaria and Baden-Württemberg, and 9% in other states).

Example of Tax On Income in Germany

To illustrate how these rates work, consider a single individual with a taxable income of €70,000:

1. Tax-Free Allowance: €11,604 (no tax).
2. Income Tax Calculation:
   • Income between €11,604 and €20,400: Taxed progressively from 14% to 24%.
   • Income between €20,400 and €60,000: Taxed progressively from 24% to 42%.
   • Income between €60,000 and €70,000: Taxed at 42%.

   The total tax due would be calculated based on these rates and brackets.

How Much do I get Back From the System?

he amount you “receive back” from Germany’s social welfare system isn’t a direct refund of the contributions you made. Instead, you benefit through access to healthcare, pension payments upon retirement, unemployment benefits if needed, and long-term care services. The system is designed to provide security and support throughout various life stages rather than returning exact contributions. The value you get is based on the benefits and protections provided by the system rather than a financial reimbursement of the contributions made.

Let’s review a hypothetical case to illustrate the contributions and benefits of the German social welfare system. Let’s assume you have been earning a gross salary of €6,000 per month for ten years. We will analyze the contributions you make towards the social welfare system during this period and what you can expect to receive in return in terms of benefits.

Monthly Contributions to Social Welfare

For a gross monthly income of €6,000, your contributions to the German social welfare system are divided into several categories:

1. Health Insurance Contributions:
   • The standard rate for health insurance contributions is approximately 14.6% to 15.6% of your gross income. For simplicity, we will use 15%.
   • This rate is shared equally between you and your employer, meaning you contribute 7.5% of your gross salary each month.
   • Monthly Contribution: 7.5% of €6,000 = €450
2. Pension Insurance Contributions:
   • The contribution rate for pension insurance is approximately 18.6% of your gross income, shared equally between you and your employer.
   • Monthly Contribution: 9.3% of €6,000 = €558
3. Unemployment Insurance Contributions:
   • The contribution rate for unemployment insurance is approximately 2.5% of your gross income, also shared equally between you and your employer.
   • Monthly Contribution: 1.25% of €6,000 = €75
4. Long-Term Care Insurance Contributions:
   • The contribution rate for long-term care insurance is approximately 3.05% (3.3% for childless employees) of your gross income, shared equally between you and your employer.
   • Monthly Contribution: 1.525% of €6,000 = €91.50

Total Monthly Contributions

When we add up all these contributions, we get the following total monthly contribution to the social welfare system:

• Health Insurance: €450
• Pension Insurance: €558
• Unemployment Insurance: €75
• Long-Term Care Insurance: €91.50

Total Monthly Contributions: €1,174.50

Total Contributions Over 10 Years

To determine your total contributions over ten years, we multiply your monthly contributions by the number of months in ten years:

• Total Contributions Over 10 Years: €1,174.50 x 12 months x 10 years = €140,940

Expected Benefits from the Social Welfare System

Now, let’s discuss what you can expect to receive in return for your contributions:

1. Healthcare:
   • By contributing to health insurance, you gain access to Germany’s high-quality healthcare system. This includes doctor visits, hospital stays, medical treatments, and prescription medications. Although you do not receive a direct monetary return, the healthcare coverage you receive can significantly reduce out-of-pocket medical expenses over time.
2. Pension:
   • The amount you will receive in pension benefits is based on your total contributions and your average earnings throughout your working life. Typically, pension benefits are calculated using a formula that takes into account the number of years you have contributed and your earnings. While the exact amount you will receive as a pension cannot be precisely determined without more specific details, your regular contributions ensure that you will receive a pension upon retirement, providing financial security in your later years.
3. Unemployment Benefits:
   • If you find yourself unemployed, you are eligible for unemployment benefits, which generally replace around 60% to 67% of your previous net income, up to a maximum limit. This safety net ensures that you have financial support while you search for new employment.
4. Long-Term Care Insurance:
   • Your contributions to long-term care insurance provide coverage for long-term care needs, such as in-home care or nursing home care. The benefits you receive depend on the level of care required and the insured amount, ensuring you have support if you need long-term care services.

Read our guide about the average Salary in Germany.