Research Paper 8: Solidarity surcharge leaves employment opportunities untapped

While the economic experts recommend the complete abolition of the solidarity surcharge at the end of 2019, the German government's coalition agreement only plans to partially exempt income tax from the surcharge. The "solidarity surcharge" is justified, among other things, by the financing of the costs of German unification and currently amounts to 5.5% of income and corporation tax. "The reluctance to reform the solidarity surcharge means that additional opportunities for growth and employment in Germany are not being realized," says Tobias Thomas, Director of the economic research institute EcoAustria, who is also affiliated with the Düsseldorf Institute for Competition Economics (DICE).

The simulations with the general dynamic equilibrium model PuMA from EcoAustria show that with the complete abolition of the solidarity surcharge, the gross domestic product would be 0.4 or 0.6 percent higher in the long term than without the reform. This would be associated with an increase in employment of 140,000 and 145,000 people respectively. The net income of private households would also increase. In comparison, the effects of the government plan are significantly lower. The partial abolition of the solidarity surcharge would reduce gross domestic product by 0.2% to 0.3% and employment by 35,000 people, or 40,000 people in the long term, compared to the complete abolition.

In both scenarios, the degree of self-financing of the reforms would amount to 40% in the short term and 50% in the long term. "If the self-financing level of the reform is taken into account, the EUR 10 billion estimated in the coalition agreement would be sufficient to finance the complete abolition of the solidarity surcharge," explains Thomas. This and the current budget surpluses show that a complete abolition of the solidarity surcharge is possible without jeopardizing the solidity of public finances in Germany, according to a study published today by EcoAustria.