<abstract xmlns="http://www.w3.org/1999/xhtml">

<p>The German coalition agreement (2021) intends to transform withholding tax class combination III/V for married couples to the symmetric tax class combination IV/IV with a factor, to strengthen economic independence and fairness. The taxation with a factor could eliminate possible disadvantages of tax class combination III/V, particularly the high marginal tax burden in tax class V. The planned reform is associated with several pitfalls. We present the expected reform effects on tax revenues and income distribution, which we calculate using a microsimulation model. We then discuss possible difficulties associated with the reform’s implementation, in particular those concerning individuals employed less than 12 months and sole earners.</p>
</abstract>

The German coalition agreement (2021) intends to transform withholding tax class combination III/V for married couples to the symmetric tax class combination IV/IV with a factor, to strengthen economic independence and fairness. The taxation with a factor could eliminate possible disadvantages of tax class combination III/V, particularly the high marginal tax burden in tax class V. The planned reform is associated with several pitfalls. We present the expected reform effects on tax revenues and income distribution, which we calculate using a microsimulation model. We then discuss possible difficulties associated with the reform’s implementation, in particular those concerning individuals employed less than 12 months and sole earners.

Distributional Effects and Pitfalls of Withholding Taxation with a Factor

Wirtschaftsdienst

This work is licensed under the Creative Commons Attribution 4.0 International License.

Verteilungswirkungen und Fallstricke des Faktorverfahrens bei der Lohnsteuer

The German coalition agreement (2021) intends to transform withholding tax class combination III/V for married couples to the symmetric tax class combination...

Distributional Effects and Pitfalls of Withholding Taxation with a Factor

Published Online: Aug 15, 2024

Page range: 549 - 554

DOI: https://doi.org/10.2478/wd-2024-0143

© 2024 Judith Herrmann et al., published by Sciendo

This work is licensed under the Creative Commons Attribution 4.0 International License.