The other side of the coin: Individual taxation in Germany - one specific, down-to earth example of the full picture

by Hermann Kracke

People in Germany earn a decent salary, enjoy the benefits of a highly developed social welfare state and live in a secure and well equipped country. Well, quite right (although on the latter - whether or not and in how far - German governments have recently been neglecting investments in public infrastructure there is currently a controversial debate).

All these fundamentally unquestionable advantages, however, also come at a cost. A cost every German citizen pays on a regular basis in the form of taxes and dues - in fact, an entire bundle of direct and indirect taxes, social security contributions and communal fees which altogether add up to a 48 to well above 62% cut of your gross earnings - depending on one’s individual income class, marital status, household size and place of residence.

If you have ever wondered what this common tax and duty burden which turns every Euro a German makes in these parts into a mere 40 to 50 Cents actually consists of in more detail - I am inviting you to join me on a sober (and sobering) review of what happens to an initially rather respectable salary out here after deductions at the end of a month:

As far as usage related (excise) taxes are concerned some typical assumptions will be made for a clearer illustration. Do note though that these sections will still list dues or taxes on those expenses only but not the cost of these expenses itself. In other terms, the following are strictly taxes and dues, no general cost of living or individual expenses included.

Now meet Christoph Muster. Chris is a full time project manager at a large German engineering company in Hannover. He is single, lives in a rented 65 square meter apartment downtown and uses his own upper middle sized car (of domestic make ;-) for his daily commute to work. He is a moderate smoker and belongs to the Protestant denomination.

Let’s further assume Chris is being paid a gross salary of € 5,590 per month or € 72,670 p.a. (12 + 1 month bonus, typically around Christmas).

In Germany employees receive a net salary from which taxes and social security contributions have already been deducted. And generally speaking, social security contributions are roughly shared equally by employer and employee.

This includes the employee’s social security contribution as specified in the following. From an employer’s view about the same amount of social security contribution (not the earnings tax though) would need to be considered on top of that.

The German social security system also requires a mandatory accident insurance contribution but that one needs to be paid by the employer alone and is thus not mentioned above. 

All these result in an employee share only, direct deduction of € 2,562 in Chris’s case which is already about 46% of his pre-tax income. Or in absolute figures an amount of € 3,028 he can take home each month. Quite a difference, though unfortunately, we are not done yet. 

There is a range of consumption related taxes and dues as well as several communal fees in Germany and pretty much all of them - except the tobacco duty as you may rightly argue - cannot be avoided by most people.

Value added tax

A regular value added tax rate of 19% applies to basically all consumer purchases (sometimes also called sales tax) with a few exceptions, one being a reduced VAT rate of 7% on certain consumer commodities and everyday services (such as groceries, newspapers, local public transport and hotel stays).

If you add up these monthly dues Chris ends up at another € 576 which brings his per month tax burden to now € 3,138. As we can already see - a sum higher than his net pay. In fact, more than 56% of his gross salary.

(From an employer’s point of view adding his employer’s share on Chris’s social security contributions to that - as due on the same income, in this example about € 910 - the resulting grand total would be a staggering € 4,048 - or more than 62%).

Don’t get me wrong, the purpose of this closer look is not to complain about any perceived hardship or ‘evil government’ from some over-saturated rich world point of view (even though I’m using the word burden and German politicians will - as anywhere - not be shy to invent some new tax or due should an ‘essential’ but previously ignored or unaddressed budget need arise).

Of course, the person in my example earns a good salary that will allow him a safe and pleasant lifestyle.

I once wanted to put across, however, that the German welfare state, high level of security and state-of-the-art infrastructure are all expensive to establish, expensive to maintain and have to be paid for - or as I tried to phrase it above: Also mind the other side of the coin.

Our friend Chris, by the way, does not have a dog. If he had one though there would be - you saw that one coming - and correct: a dog license fee (at his place 11 bucks per month - in case you must know ;-)