The income tax in Germany is by no means static. Rather, there has been a lot of momentum in the development of income tax in Germany. The development of the basic allowance alone took place in some large jumps. In addition, the income tax has always been a topic of discussion in the political debate. We examine the historical development and analyze the turning points in the history of income tax in the Federal Republic. And anyone who thinks that you pay more taxes today than ever before should take a particularly close look at the figures presented here.

1.Development of income tax in Germany – Introduction

“Everything used to be better”, “Income tax is way too high” and “Entrepreneurs pay way too much tax – more than ever” – we all know this and similar lawsuits. They are as old as the taxes themselves. But are they currently justified? Yes, do they fit it together? Anyone who wants to understand the current lamentation about excessive taxes in order to find out their truthfulness must look back into the history of the income tax of the Federal Republic of Germany. Three elements play a major role: the development of the basic allowance, the input tax rate and the top tax rate/rich tax rate on income tax.

So we go back in time and invite you to join us on an amazing expedition into German tax law. We hope we can surprise you more than once.

First of all, a note: all images included here are taken from the document “tariff history”, which is freely available on the website of the Federal Ministry of Finance – Wage and Income Tax Calculator as a PDF for download.

2. development of income tax: start of our journey in 1952

After the end of the Second World War, when Germany was in ruins, the victorious powers decided on the income tax in Germany. They increased it in particular with regard to the top tax rate, which at that time was as much as 95 % above a certain level of income.

But even with the emergence of the Federal Republic, the regulations regarding income taxation in Germany changed. However, for many decades this tax legislation only applied to the West of Germany. Our remarks relate solely to this. From 1952, the income tax was determined by means of an income tax table. At that time, the basic allowance was DM 750 and a distinction was made between tax classes I, II and III. Already at this time, wage tax was separated according to these classes, which were later extended by three more classes. There were two different tables, one of which was valid only for taxable income up to DM 5,000.

Already in 1954 there was a change in income tax law. At that time, the basic allowance increased to DM 900. But already in 1958 it was already DM 1,680. At that time, the input tax rate with 20% accessed the first DM 8.009. The next progression zone began at a marginal tax rate of 29%, which slowly increased until DM 23.999. From DM 24,000 onwards, the marginal tax rate gradually climbed from just under 39 % to over 50 %. And from an income of DM 110,040 the top tax rate of 53% applied.

From 1965 there was a slight change. Here, the development of income tax shows an input tax rate reduced to 19% and a continuously increasing marginal burden from DM 8.010, which only made a small jump upwards from the top tax rate. The top tax rate of 53 % from DM 110.040 remained unchanged. Thus, the second stage had been replaced in the previous calculation model in favor of a gradual increase in the marginal load.

3. development of income tax from 1975

This income taxation remained unchanged for many years. It was the time of the German economic miracle, the tax revenue bubbling into the budget. But then, in 1973, the oil price crisis occurred as important oil-exporting countries in the Arab region dramatically increased their prices for their black gold for political reasons. This also had a direct impact on Germany and its economy. The consequences were high inflation and other negative effects for Germany as a business location. Therefore, the legislature also reacted by adjusting the income tax.

In 1975, the limit from which the top tax rate had to be paid was first increased by DM 20,000. In addition, the initial tax rate was increased from 19 to 22 % and the basic allowance to DM 3.029. At the same time, the income range (linear zone) for which the input tax rate had to be applied was extended. For example, income between DM 3.030 and DM 16.019 was subject to 22% income tax. From DM 16.020 you paid significantly more taxes for each additional DM. The marginal tax rate at this threshold was over 30%. The top tax rate also changed. This now went stepless with an income DM 130,020 from the existing marginal burden and reached then 56 %.

4. development of income tax in the 1980s

After a small adjustment in 1978 and 1979, when the basic allowance was increased to DM 3,329 and then to DM 3,690, a new development of income tax took place in 1981. In addition to a further increase in the basic allowance to DM 4.212, the scope of application was extended to up to DM 18,000. Only in addition did the marginal burden increase up to the top tax rate.

So it remained almost unchanged until 1989. Here too, changes primarily concerned the basic allowance and the income range to which the input tax rate applied. Only with the turnaround did a new development of income tax in Germany occur.

5. Evolution of income tax after reunification

From 1990 onwards, the income range, in which the initial tax rate of 19 % was to be expected, ranged from DM 5,616 to DM 8,153. Unlike before, however, the marginal burden up to the top tax rate increased linearly. In addition, the income from which the top tax rate was payable fell by about DM 10,000 to DM 120,042. At the same time, however, the top tax rate was reduced to 53%.

The next big cut in the development of income tax took place in 1996. At that time, the basic allowance was doubled to DM 12.095 due to a decision of the BVerfG of 25.09.1992. However, this was accompanied by an equally strong increase in the input tax rate. In this way, the aim was to compensate for the tax losses resulting from the increase in the basic allowance. Now, from the first DM above the basic allowance, an income tax of 25.9% was already incurred. Until the next progression zone, with an income starting at DM 55.728, the marginal burden was relatively flat and linear, but also rose somewhat steeper.

In 1998 there was a further increase in the basic allowance and income limit to the next higher progression zone. This was also necessary in 1999 from the point of view of the legislator. But it also introduced another progression zone between these two. So you paid from an income of DM 17.064 just under 27 % income tax. At the same time, however, the input tax rate was also reduced to 23.9%.

6. Evolution of income tax from the turn of the millennium

A year later, the initial tax rate was reduced again; This time by 1% point to 22.9%. At the same time, the top tax rate was reduced to 51% and the amount of income from which it was to take effect was reduced slightly by about DM 5,000. In addition, the tax rate, which was previously upstream of the top tax rate, was abolished. The progression between DM 17.496 and DM 114.696 was now linearly increasing from 22.9% to 51%.

These fiscal tendencies continued in 2001. Now the input tax rate from an income of DM 14.094 was 19.9%. The next progression zone began at DM 18.090, which required a marginal tax rate of about 23%. The linear increase in the applicable tax rate now led to DM 107,568. From this level of income, 48.5% were now due on each additional DM. Thus, for the first time in the history of the Federal Republic of Germany, the top tax rate reached a tax rate of less than 50%. We remember: before it was 53% most of the time, sometimes reached a proud 56%.

7. Evolution of income tax in the course of the 2002 monetary reform

In the following year, the currency conversion took place, so that we can now continue to calculate in euros. However, this did not have a major impact on the income tax situation.

Only in 2004 did a significant development of income tax take place again. Thus, the input tax rate was reduced to 16%, with the basic allowance only slightly increased. For this, the area over which the progression now increased was significantly raised. While it was previously EUR 9,251 from which the next progression zone applied, it was now EUR 12,739 as the income limit for this. There were also adjustments to the top tax rate. Thus, it was reduced further to 45 %, which, however, was now already applicable from an income of EUR 52,152.

In the following two years, this trend in the development of income tax was followed. The input tax rate was now only 15 %. However, the basic allowance was left at EUR 7,664. The border to the next progression zone also remained unchanged. For this, the top tax rate was reduced again. I am sure you will recognise it, because it has been 42% since then.

8. introduction of the rich tax rate and further developments

By and large unchanged, 2007 still brought a bang in terms of income taxation in Germany. As of this year, the Treasury levied a tax above the top tax rate: the so-called Reichsteuer. It was to be levied at 45% on all income tax gains exceeding EUR 250,000.

Just one year later, the initial tax rate was reduced to 14%, while the basic allowance was increased slightly to EUR 7,834. The income levels to the other progression zones were also set up slightly.

Since then, the framework in which income taxation in Germany varies between the input tax rate and the top tax rate or the rich tax rate has hardly changed. Even today, the input tax rate is 14%, the peak tax rate is 42% and the rich tax rate is 45%. Only the income limits to the respective progression zones have been shifted, often only to a small extent, this being especially true of the tax rate applied at the boundaries of the progression zones.

Only the recent inflation led to more comprehensive adjustments in income limits, especially in the basic allowance, but also in the other tax rate levels. These increases are already relevant from the income tax assessment in 2023, so that many taxpayers with low income can enjoy a tax relief, if they have not received any significant wage or salary increases (otherwise the cold progression threatens). For the federal budget, however, this means a lower increase in tax revenue compared to the past.

9. Evolution of income tax – Conclusion

9.1. Trending increase in adjustments to income tax calculation

Let us now draw a conclusion. What did we notice in particular? As already mentioned, the low frequency with which the legislature sought to change the income tax in the early days of the FRG stands out. Apparently, a consistently flourishing economy did not see any significant need for reform at that time. It was only with the oil crisis and the simultaneous downturn in the German economy that action was needed. And yet the average burden remained relatively high across all income sectors.

It is interesting that since the implementation of the BVerfG judgment of 25 September 1992 to link the basic allowance to the subsistence minimum, adjustments have been made to the basic allowance and the other progression zones and their income limits virtually every year. Compared to this explosive increase in changes to income taxation, one can hardly speak of a development of income tax for the first decades of the Federal Republic of Germany; It basically remained unchanged for a long time.

9.2. tendential decrease in tax burden

Today, on average, you pay significantly less taxes than in the past. And this despite the fact that tax revenue has climbed to new record highs in recent years despite many crises. However, this is also due to other tax sources. This is also obvious in absolute terms: with an input tax rate of 14% and an upper maximum of 45%, taxpayers at all ends of the income range would certainly have been more than happy 40 years ago.

And yet today, there is a general feeling that taxes have never burdened the private coffers and those of companies higher. Of course, expenditure in other areas has also risen sharply over time. In addition, the general financial recovery of many taxpayers has led to a higher marginal tax rate due to the tax progression and thus to a higher average burden. So this is where many different factors come together that create the illusion of too much taxation. For example, the fact that Germany has remained a high-tax country in international comparison is often used here, although such a comparison is hardly applicable to the own situation of most taxpayers. Therefore, this view of income tax in Germany is only superficially conclusive, as this retrospective clearly shows us.

9.3 Is it still the low taxation in Germany?

So if you wish for the good old days back today, for example to the Helmut Kohl era, hopefully the objective view will be restored in the course of this little time travel. Because the development of the income tax went over some heights into a valley in which we are currently fortunately located. And as it stands, despite many unknowing cries, there will seem to be no change in this situation in the medium and perhaps also in the long term – even if the need for additional tax revenue increases further in the future.