Project in detail

Implicit Taxation in the German Social Insurance System

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The proportion of social insurance contributions not reflected in corresponding benefits can be regarded as an implicit tax. Fundamentally, two concepts are distinguished: the ``life-cycle-related implicit tax´´, whereby contributions paid and benefits received throughout an insured person's entire life are compared, and the ``period-based implicit tax´´, whereby the contributions and benefits or acquired claims of a specific period are compared. The life-cycle-related implicit tax is used, for example, to analyze the intergenerational distributive effects of reforms, whereas the period-based implicit tax is a measure for the social-insurance-induced tax wedge between marginal product of work and net wage, hence for distortions caused by the social insurance system. The project started out by calculating period-based implicit taxes for the German systems of Statutory Health Insurance (GKV), Social Long-Term Care Insurance (SPV) and Statutory Pension Insurance (GRV), based on specific age cohorts, income brackets, men and women, and east and west Germany. The results were then aggregated to produce an overview of age-specific, income-specific and gender-specific implicit tax rates for the entire social insurance system. Subsequently, age- and income-specific ``wage tax rates´´ were derived for the entire levy system by adding together the implicit tax inherent in the social insurance system and the explicit wage tax imposed by the income tax system. Finally, the effects of social reforms, such as the introduction of the ``Swiss Model´´ to GRV or lump-sum contributions to GKV, were illuminated with regard to their level and structure of implicit taxation. An abridged version of MEA Discussion Paper No. 190-09 was published in the refereed journal Jahrbuch für Wirtschaftswissenschaften in 2009. The model for the computation of implicit tax rates is to be brought up-to-date on a regular basis, and used for the assessment of reform proposals and measures. It was last updated in 2011 and applied to a comparison of various pension adjustment formulas. The implicit tax rates for contributories were computed and compared for the years 2010, 2030 and 2050. A long-range plan is to calculate life-cycle-related implicit taxes for all social insurance branches.

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