Income and Wealth Distribution in Germany: A Macroeconomic Perspective

Household economic surveys, such as the German Socio-Economic Panel, notoriously underestimate the degree of income and wealth inequality at the upper end of the distribution.

To combat this, a new approach developed by Thomas Piketty and co-authors analyzes tax return data in an attempt at better measuring top incomes and wealth. But in the case of Germany, this approach faces a number of difficulties. Since 2009, capital incomes have been subject to a flat rate withholding tax, levied at source. In addition, Germany abandoned the wealth tax in 1997.

This makes it difficult to measure the distribution of wealth and capital incomes. Moreover, at the conceptual level, top household income shares underestimate the rise of inequality in Germany because much of the shift in income distribution since the early 2000s has taken the form of rising corporate profits, which in large part have been retained by firms and hence are not counted as household income.

Despite these problems, the attached paper shows that it is possible to develop preliminary measures of income and wealth inequality by combining information from household surveys and national accounts data. It also argues that reducing inequality would contribute to reducing Germany’s export surplus and thereby enhance macroeconomic stability.

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