Demographic change and income tax revenue in Germany: a microsimulation approach

• Main Authors: Martin Beznoska, Tobias Hentze
• Format: Article
• Language: English
• Published: Institute of Public Finance 2017-03-01
• Series: Public Sector Economics
• Subjects: public finance; tax revenue; demographic change; microsimulation
• Online Access: http://www.pse-journal.hr/upload/files/pse/2017/1/beznoska_hentze.pdf

As a result of high net migration, both Germany’s overall population and its workforce potential are currently growing. However, within a few years this demographic trend will be reversed, leading to a decline in population as a whole and especially in the number of those gainfully employed. In this paper, we use a population projection to apply a static ageing approach to German micro data. Then, we simulate income tax revenue with a microsimulation model for the future population. In 20 years’ time the annual price-adjusted income tax loss is estimated to be equal to € 18 billion or almost 7 per cent. This fall in income tax revenue resulting from a shrinking and ageing society will place a huge strain on public finances in Germany, an effect further enhanced by the shift of the tax burden from pension contributions to pension benefits.