Inequality in Germany – Policy measures to reverse the trend

The Forum New Economy Working Paper series sees its latest addition: a paper that reviews trends and drivers of income and wealth inequality in Germany, and derives possible policy options.

 

Motivated by a context of still very divergent views on the extent of and possible instruments against inequality, the Forum New Economy engaged in a multi-year project that sought to disentangle the debate around inequality in Germany and clear it up from clichés. Inequality in Germany: Policy measures to reverse the trend by Stefan Bach, Markus M. Grabka und Marc C. Adam (currently only available in German) is the third part of this series of studies on inequality, commissioned by the Forum, that build on each other to provide answers around this debate and reflect the current state of empirical research.

The first two studies dealt respectively with: evaluating which methods are suitable to measure inequality (Bartels & Schroeder 2020a) and its decomposition by factor components (Bartels & Schroeder 2020b).

This third part is a first attempt to estimate which measures are fundamentally suitable for reducing inequality on the basis of an updated and expanded classification of the drivers of inequality. For income, a rough hierarchy of possible measures was made according to their relative effect on distribution. For wealth inequality, estimates were made of the effect of a wealth tax or levy and the introduction of a basic inheritance. The authors conclude that for income, the focus should be on labour market reforms, reform of the tax and transfer system and taxation of capital income or wealth in order to address the underlying inequality that contributes significantly to the increase in net household income inequality. Addressing wealth inequality would involve, on the one hand, promoting private wealth accumulation (e.g. through the promotion of home ownership or a more effective supplementary pension system) or achieving some redistribution through taxation of high incomes and wealth. Relevant options include a reform of the inheritance tax; the additional revenue could be used to finance a universal capital endowment. The publication is available for free download here

Further stages of the Forum´s project on inequality include a systematic simulation of the different measures to reduce wealth inequality. This should enable to better assess which measures have which effect on different measures of inequality.

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