Tax Revenue Decrease Instead of Targeting the Wealthy? Germany's Ifo Warns of the "Limit Point of Tax Increases"

"If tax revenue is insufficient, just raise the tax rate for high-income earners."

This is a recurring debate in countries facing fiscal deficits and increasing social security costs. The idea is to ask those with higher incomes to bear a greater burden and redirect that revenue to support low-income earners and families raising children. At first glance, it seems straightforward and politically easy to explain.

However, in Germany, economists are now warning against this very notion.

Andreas Peichl, who heads the fiscal research department at the Ifo Institute for Economic Research based in Munich, has expressed concerns that the German government's planned increase in the "wealth tax" and the additional raising of the premium calculation ceiling in public health insurance might not increase national revenue despite higher tax rates and burdens. Instead, it could lead to a revenue shortfall of several billion euros.

The underlying issue involves "human behavior," which cannot be captured by simple calculations.

Raising tax rates does indeed increase the tax amount on the same income. However, people may not continue to work and receive income in the same way as before. Some might reduce their working hours, take more vacations, switch from being employees to corporate managers in terms of how they receive income, or more actively utilize tax deductions.

In other words, when the state changes tax rates, taxpayers also change their behavior.

The debate beginning in Germany is not merely about "favoring the rich or increasing taxes." It is a more fundamental issue of "how much burden on labor income will start to change people's way of working."

From 45% to 47%: The new "wealth tax" planned by the German government

In the income tax reform being pursued by Germany's coalition government, small to medium-income groups and families raising children will receive tax cuts, while part of the funding will be secured by increasing the burden on high-income earners.

Under the current system, the so-called "Reichensteuer (wealth tax)" of 45% applies to the portion of taxable income exceeding 277,826 euros for single individuals.

The new system is planned to have a two-tier structure.

A 45% rate will apply to taxable income over 250,000 euros, and a higher rate of 47% will be set for income over 280,000 euros. The reform is set to begin in 2027, with the government envisioning a tax reduction effect of about 10 billion euros annually by 2028. According to the government, a family with two children and an income of about 60,000 euros could see an annual burden reduction of over 600 euros in 2028.

Looking at the figure of 47% alone, it might not seem particularly high to Japanese people.

In Japan, the highest national income tax rate is also 45%, to which local inhabitant taxes are added. The 45% income tax applies to the portion of taxable income exceeding 40 million yen, so Japan is already at a high level in terms of the highest tax rate alone.

However, Germany's issue is not limited to income tax.

"Another tax increase"—Raising the ceiling on social insurance premiums

What Ifo particularly sees as problematic is the simultaneous increase in the burden of public health insurance.

In Germany's public health insurance, similar to Japan's health insurance, there is a "premium calculation ceiling" to prevent unlimited increases in premiums on income exceeding a certain amount.

In 2026, the ceiling for public health and nursing care insurance is set at 69,750 euros annually, or 5,812.50 euros monthly. In 2027, the government plans to raise this ceiling by an additional 300 euros monthly, on top of the usual revisions due to wage increases.

According to the German Ministry of Health, this measure alone will increase the personal burden on high-income public health insurance subscribers by about 26 euros per month.

Each individual figure might not seem very large.

However, high-income employees must consider the total burden, including income tax, solidarity surcharge, health insurance, and nursing care insurance.

This is the core of Ifo's warning.

"It's not a problem because it's 47%."

The issue is that multiple increases in burden are simultaneously imposed on those who already bear a high tax and social insurance burden.

In Germany, even average employees face "about half of labor costs" going to taxes and social insurance

To understand this background, OECD data is helpful.

According to the OECD's "Taxing Wages 2026," the "tax wedge," which combines income tax and social insurance premiums for both employees and employers, was 49.3% in Germany for a single, childless worker earning the average wage in 2025.

In Japan, it is 33.1%.

This does not mean "49.3% of the salary is directly deducted as tax." It is an indicator of how much taxes and social insurance account for in the total labor cost, including the social insurance premiums paid by the company.

Nevertheless, the difference is significant. Germany is one of the countries with extremely heavy public burdens on labor among OECD member countries.

In this situation, "how much of the additional income can be kept when working more to increase income" becomes important.

Getting promoted and taking on more responsibility.

Increasing overtime.

Taking on a side job.

Growing a company to increase profits.

If much of the additional income gained from these actions is consumed by taxes and social insurance, it is not surprising that more people might question whether it is worth working that hard.

The misunderstanding pointed out by Ifo: "Raising tax rates will increase tax revenue"

Peichl argues that the burden on high-income earners in Germany is already near its limit.

Therefore, imposing additional burdens may not increase tax revenue as much as the simple multiplication of "tax rate x current income" would suggest.

For example, if a highly paid professional changes from working five days a week to four.

For the individual, income decreases but free time increases. On the other hand, from the government's perspective, income tax and social insurance revenue decrease.

A business owner might consider reducing the amount received as salary and finding other ways to retain profits.

More people might increase consultations with tax accountants and thoroughly utilize available deductions.

Furthermore, highly skilled personnel who can work across borders might choose to change their residence.

The larger the tax rate increase, the harder it becomes to ignore such "behavioral changes."

This is a theme that has long been debated in economics and is linked to the idea that "raising tax rates from zero increases tax revenue, but beyond a certain level, economic activity and taxable income shrink, and tax revenue no longer increases."

However, this does not mean "tax revenue will necessarily decrease if it exceeds 47%."

How people respond to tax rates varies greatly depending on occupation, income composition, corporate systems, deduction systems, and ease of relocation.

Therefore, Ifo's warning of a "revenue shortfall of several billion euros" should be understood as a policy evaluation that emphasizes behavioral changes rather than a predetermined future.

"Reduce deductions rather than raise tax rates"—An alternative option suggested by Ifo

Interestingly, Ifo is not advocating a simple "tax cut" argument.

Peichl argues that if the state needs more tax revenue, it is more effective to organize the numerous deductions and preferential measures in income tax rather than raising the tax rates themselves.

Germany has a very large number of mechanisms that can reduce tax burdens, including those related to craftsman services for home repairs and various activities.

According to the original article, Peichl states that there are over 500 deduction and preferential options, and if about half of them could be abolished, it could lead to additional tax revenue of about 35 billion euros annually.

This idea is important.

Raising the tax rate from 47% to 49% and then to 50% is not the only way to increase revenue.

Even without significantly changing tax rates, expanding the tax base can increase revenue.

Rather than a system with high tax rates and many exceptions, a system that "keeps tax rates low but has fewer exceptions" might distort people's behavior less and reduce administrative costs.

The dissatisfaction prominent on social media: "It's not the wealthy but those who work and earn who are targeted"

The reform has sparked quite intense debates on German-speaking social media and Reddit.

Particularly noticeable in high-income and financially interested communities is the criticism that "the government repeatedly targets high incomes earned through work rather than wealth itself."

In a Reddit community for high-income earners, there are posts criticizing the reform of applying a 45% tax rate from 250,000 euros and 47% from 280,000 euros, saying "working hard and succeeding is no longer rewarded."

At the same time, there are also questions raised about "not adequately addressing inheritance and asset income, but targeting labor income."

On the other hand, some comments view the proposal calmly, saying, "I thought they would impose 45% from a much lower income, so this proposal was milder than expected," and "It basically doesn't affect those under 250,000 euros."

There is even stronger dissatisfaction regarding the raising of the public health insurance burden ceiling.

On Reddit, there are posts with sentiments like "raising premiums alone doesn't constitute structural reform," "there's no visible service improvement despite the increased burden," and "it's not reform but a stopgap measure."

On X, there is also criticism that the additional raising of the premium calculation ceiling further increases the burden on high-income employees and professionals.

Of course, social media posts are not opinion polls.

Especially financial communities may have a higher proportion of high-income earners and investors, making it easier for critical opinions on tax increases to gather compared to the broader German society.

This point needs to be noted.

On the other hand, there is also a very strong public opinion that "the wealthy should bear more burden"

Looking only at the tax increase criticism on social media, it might seem like many Germans oppose increasing taxes on high-income earners.

However, the actual public opinion is more complex.

In a representative survey conducted by ARD in April 2026, 81% of respondents said that "economic wealth is unfairly distributed in Germany."

There is also strong demand for strengthening taxation on the wealthy, inheritance tax, and asset taxation.

However, in the ZDF political barometer in July, 81% of people thought the government's reform was "unfair" in terms of burden distribution, with only 12% considering it "fair."

At first glance, this seems contradictory.

"The disparity is too large. The wealthy should bear more burden."

But at the same time,

"The reform proposed by the government is not fair."

Many Germans may be feeling both of these simultaneously.

The issue is not "whether to burden the wealthy," but "who is defined as wealthy, and on which income or assets should the burden be placed and by what method."

"High-income earners" and "wealthy individuals" are not the same

This is a very important point for Japan as well.

Consider a doctor, engineer, or business owner with an annual income of 30 million yen.

They are indeed generally considered high-income earners.

However, that does not necessarily mean they own vast assets.

On the other hand, there are people who may not have high salary income but have inherited real estate or stocks worth billions of yen from their parents.

The former are "people who earn high income through labor."

The latter are "people who hold large assets."

Grouping these two under the same term "wealthy" in the tax system can confuse the debate.

The background to the voices on German social media asking "why only tax income" and "shouldn't we discuss inheritance and assets" lies in this difference.

In fact, even among those who support increasing taxes on high-income earners in Germany, there are points raised that "simply raising tax rates on labor income will not solve the wealth disparity issue."

Thus, it cannot be neatly categorized into a simple dichotomy of right-wing vs. left-wing or tax increase vs. tax cut.

Japan is also beginning to raise the ceiling on social insurance premiums

The biggest reason why Japanese people cannot see the current German debate as someone else's problem is the social insurance system.

In Japan, there is also a ceiling on the "standard monthly remuneration" used to calculate welfare pension insurance premiums for salaries above a certain level.

The current ceiling is 650,000 yen, but due to system revisions, it is scheduled to be gradually raised to 680,000 yen in September 2027, 710,000 yen in September 2028, and 750,000 yen in September 2029.

The concept is very similar to that in Germany.

From the government's perspective, there is an issue that "if income is rising but the premium calculation ceiling is fixed, the