The cause is an unfair tax system and bureaucracy: no initiative! We are not motivated to work because performance doesn't pay off

The Reward of Mediocrity: How Tax Progression and Bureaucracy Stifle Upward Mobility

Germany faces a fundamental legitimacy problem: those who work more, take on more responsibility, or advance their careers see surprisingly little return on their additional effort. The German tax and transfer system creates perverse incentives that systematically undermine the willingness to perform. The result is a society in which overtime simply doesn't pay off for large segments of the population – with far-reaching consequences for growth, productivity, and social justice.

The problem begins where it hurts most: in the middle of the income distribution. The so-called "middle-class bulge" reveals itself as a brutal tax trap. While the basic tax-free allowance will be €12,096 in 2025, the marginal tax rate rises to 24 percent starting at €17,444 and reaches the top tax rate of 42 percent at €68,480. This means that a skilled worker who currently earns just below this threshold will have to hand over almost half of every additional euro to the state.

The absurdity of this progressive tax system becomes clear in international comparison. Germany ranks second among 38 OECD countries in terms of the tax burden on earned income. In 2024, a single person with an average income had to pay a total of 47.9 percent of their salary in taxes and social security contributions – only Belgium, at 52.6 percent, had a higher rate. The OECD average was just 34.8 percent. Germany thus taxes earned income significantly more heavily than most comparable industrialized nations, while at the same time taxing wealth and capital gains comparatively less.

Bracket creep further exacerbates this trend. In 2022 alone, the inflation-related increase in taxes cost private households an average of €325, totaling €10.9 billion. The upper middle class, with an annual disposable income of around €60,000, bore the heaviest burden relative to their income. While compensation mechanisms have been introduced since 2023, these only partially and with a time lag offset the real increase in tax burden from previous years.

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When overtime becomes a zero sum

The real drama unfolds when considering marginal tax rates – that is, the portion of each additional euro earned that actually reaches the employee. In the lower and middle income brackets, the interplay of taxes, social security contributions, and benefit reductions creates marginal tax rates that counteract any rational employment decision.

Transfer withdrawal rates describe how much state social benefits decrease when someone earns their own income.

Specifically, this means that anyone receiving benefits such as citizen's income, housing allowance, or child supplement who starts working or increases their working hours will have these benefits gradually reduced. The transfer withdrawal rate indicates how much of each additional euro earned is ultimately lost because the state reduces the transfer payments accordingly.

A simple example: If the benefit withdrawal rate is 80 percent, then 1 euro of additional income results in 80 cents being deducted from social benefits – only 20 cents actually appear as additional disposable income. In some situations, the withdrawal rates can be so high that additional work yields almost no income or, in extreme cases, even less money, because taxes and social security contributions are also due at the same time.

Economically, benefit withdrawal rates are crucial because they determine the work incentives of people receiving benefits. High withdrawal rates reduce the incentive to work more or to take up employment at all, because the additional effort is hardly financially worthwhile. Therefore, the current reform debate focuses on lowering withdrawal rates and structuring allowances in such a way that the transition from benefit receipt to gainful employment that provides a living wage is actually worthwhile.

A minimum wage earner with a gross salary of €1,600 retains only €53 net from a €100 salary increase – a marginal tax rate of 47 percent. The impact is even more drastic when transitioning from welfare benefits to employment. For recipients of basic income support, benefit reduction rates range from 80 to 100 percent. In concrete terms, this means that someone who works more while receiving basic income support may, in extreme cases, end up with less money available than before due to higher social security contributions and the reduction in benefits.

The Bertelsmann Foundation vividly documents these perverse incentives. In certain income constellations, the effective marginal tax rate reaches 100 percent – ​​additional work yields zero additional disposable income. For single individuals in the low-wage sector, taking on a full-time job results in participation burdens of 75 to 80 percent. In other words, only 20 to 25 percent of their gross income remains as net additional income.

The system also penalizes more subtle forms of increased productivity. Those transitioning from a mini-job to employment subject to social security contributions experience abrupt increases in their tax burden. The mini-job system itself acts as a part-time trap, particularly for women. Around 70 percent of those exclusively in marginal employment are women, for whom a mini-job often marks the beginning of precarious employment without social security. Joint taxation of married couples further exacerbates these perverse incentives by making employment less attractive for secondary earners – predominantly women – through higher marginal tax rates.

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Bureaucracy as a brake on growth

In addition to the excessive tax burden, there is a second fundamental problem: rampant bureaucracy. According to their own figures, German companies have had to hire 325,000 additional employees in the last three years simply to meet increased bureaucratic requirements. These employees do not produce goods, develop innovations, or serve customers – they fill out forms, document processes, and fulfill reporting obligations.

The figures are striking: Small and medium-sized enterprises (SMEs) spend an average of 32 hours per month on bureaucratic processes, which equates to about seven percent of their total working time. This results in personnel costs of 61 billion euros annually. Small businesses are particularly hard hit. Sole proprietors have to spend 8.7 percent of their working time fulfilling legal obligations – three times as much as companies with over 50 employees. More than half of the total bureaucratic burden on SMEs is attributable to companies with up to nine employees.

The burden has not increased steadily, but has risen dramatically in recent times. Businesses rate their current bureaucratic burden at an average of 6.8 on a scale of 1 to 10 – an increase of more than one point within three years. Particularly alarming: The proportion of businesses rating their bureaucratic burden as very high (maximum value 10) rose from 4 percent in 2022 to 14 percent in 2025. Among micro-enterprises with fewer than 10 employees, the proportion with the highest ratings even increased from 15 to 41 percent.

Companies identify the General Data Protection Regulation (GDPR), EU IT security regulations, and the Supply Chain Due Diligence Act as the main drivers. The consequences are devastating: around 80 percent of businesses report rising costs, and over half report declining productivity. In roughly one in four companies, innovation and investment suffer under the burden of bureaucracy. According to calculations, the costs of bureaucracy, in the form of lost economic output, averaged €146 billion per year between 2015 and 2022.

Bureaucracy also places a considerable burden on private households. Preparing a tax return takes an average of 6.3 hours, with the time required increasing with higher levels of education. Only 18 percent of taxpayers are certain they have done everything correctly, while 57 percent are rather unsure. German citizens give the tax authorities around one billion euros every year because they fail to claim potential tax benefits due to a lack of knowledge or because they feel overwhelmed.

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Structural barriers to expanding working hours

The combination of perverse tax incentives and structural deficiencies means that Germany is dramatically underutilizing its labor potential. The figures speak for themselves: In 2023, the average person of working age in Germany worked 1,036 hours – the third-worst figure among OECD countries. By comparison, the average is 1,172 hours in Greece, 1,304 hours in Poland, and over 1,400 hours in New Zealand.

While other European countries have significantly increased their working hours in the past decade – Spain by 15 percent, Greece by 21 percent, Poland by 23 percent – ​​working hours in Germany rose by only 2 percent. This is not primarily a problem of a lack of willingness to work, but rather of structural barriers and perverse incentives.

A key problem is the extremely high rate of part-time work. By 2025, around 40 percent of the workforce was working part-time, and for women, it was almost one in two. Approximately four out of ten employees do not work full-time, which drastically reduces the average annual working hours. Many of these part-time workers would like to work more, but encounter significant obstacles.

The lack of childcare is the most serious structural problem. Nationwide, there is a shortage of 306,000 daycare places for children up to three years old, and another ten thousand for primary school children. Without reliable full-day care, mothers in particular cannot extend their working hours. The situation has even worsened in recent years because childcare facilities are understaffed and parents frequently have negative experiences with their reliability.

Joint taxation of married couples exacerbates these problems. Studies show that women reduce their earned income by an average of 20 percent after marriage. This splitting, combined with free co-insurance in statutory health insurance and mini-jobs, sometimes leads to marginal tax burdens of over 100 percent for the second earner. This creates significant disincentives against married women increasing their working hours.

The legal framework for part-time work and returning to full-time employment makes flexible solutions difficult. While the 2019 "Bridging Part-Time Work Act" theoretically allows for temporary part-time work with a right to return to full-time employment, it only applies to companies with more than 45 employees and is subject to further restrictions. This law is therefore ineffective in smaller companies, where many women work part-time.

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The consequences for the economy and society

The economic consequences of these perverse incentive structures are dramatic. The Institute for Employment Research (IAB) reports a total working volume of 53.6 billion hours for 2024 – more than 20 years ago, but far too little given demographic changes. The baby boomers are now retiring. According to IW forecasts, almost 20 million people will leave the labor market by 2036. The total working volume could decline if no massive countermeasures are taken.

This further exacerbates the skills shortage. Companies cannot find qualified employees, while at the same time, people wishing to increase their income are thwarted by perverse tax incentives. The high tax burden also makes Germany unattractive as a location for qualified international professionals. The tax rate for employment subject to social security contributions rose to a record high of 42.3 percent in January 2025. By comparison, it was 41.9 percent in 2022.

The fiscal effects are paradoxical. On the one hand, the high burden leads to tax revenues of over one trillion euros. On the other hand, due to perverse incentives, massive tax revenues from unrealized work remain unclaimed. Simulations show that reforms to benefit withdrawal rates could increase the labor supply and become self-financing in the medium term because more people would work and thus pay taxes, while receiving fewer benefits.

The social consequences are no less serious. The system systematically produces poverty in old age, especially among women. Those who work part-time or in mini-jobs for decades do not accrue sufficient pension entitlements. The lack of social security contributions for mini-jobs means that employees are dependent on basic income support in old age. The community then pays twice: once through lost social security contributions, and later through social benefits in old age.

The legitimacy of the tax state erodes when high earners subjectively feel punished for their efforts. Surveys show that 60 percent of employees perceive the tax burden as too high; among the middle class with net household incomes between €2,500 and €4,000, this figure rises to 68 percent. The middle class bears the brunt of the welfare state's burden, while very low incomes are relieved by transfer payments, and very high incomes are, relatively speaking, less burdened.

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Reform options and political blockages

The diagnosis is clear, the therapy complex. Almost all political parties acknowledge the problem of the middle-class bulge and propose reforms – however, their approaches differ fundamentally.

The FDP is calling for the most radical solution: a linear-progressive tax system that completely eliminates the middle-class tax bulge, an increase in the basic tax allowance by at least €1,000, and a top tax rate only starting at €96,600. The CDU/CSU are advocating for a flattening of the tax scale and a significant increase in the threshold for the top tax rate, while simultaneously reducing the overall burden of social security contributions to 40 percent. The SPD wants to increase the tax burden on the top 5 percent and provide relief for the remaining 95 percent, with the top tax rate only applying to incomes above €70,000.

Regarding benefit reduction rates, economists propose constant crediting rates of 70 to 80 percent for higher earned incomes within the basic income scheme, combined with an increase in the benefit reduction rate for the child supplement to 70 percent. This would avoid the currently existing marginal tax rates of 100 percent in some cases and strengthen work incentives. However, the income bracket in which entitlements to housing benefit and the child supplement exist would expand considerably upwards – with corresponding fiscal costs.

Many economists believe that joint taxation of married couples should be replaced by real income splitting with a transfer payment equal to the basic tax allowance. This would guarantee the tax exemption of the subsistence minimum for both partners, but would significantly increase the work incentives for second earners. However, such a reform is highly controversial politically, as it would place an additional burden on single-earner couples.

Many experts believe that mini-jobs should be included in social security contributions from the first euro earned. Subsidizing short working hours for people of prime working age is no longer justifiable given the skilled labor shortage. However, mini-jobs could be retained for school pupils, students, and pensioners.

The debt brake acts as a barrier to reform. Tax cuts lead to short-term revenue losses, while the positive employment effects only materialize in the medium to long term. The Finance Ministry would have to close this gap from the current budget, which is considered unrealistic given tight finances. The debt brake thus becomes a brake on tax cuts and perpetuates the structural overburdening of the middle class.

While four laws aimed at reducing bureaucracy have been passed since 2015, their impact is negated by the simultaneous and massive increase in compliance costs. The National Regulatory Control Council recorded one of the highest increases in compliance costs in 2023. As long as new regulations are introduced faster than old ones are dismantled, reducing bureaucracy remains mere rhetoric.

The paradox of the overburdened welfare state

The German tax and social security system is facing a fundamental crisis of legitimacy. It taxes performance so heavily that overtime is hardly worthwhile for large segments of the population. Through the reduction of benefits and the burden of taxes, it creates marginal tax rates that discourage rationally thinking people from taking up employment or increasing their working hours. Through excessive bureaucracy, it ties hundreds of thousands of highly qualified workers to unproductive administrative tasks.

The middle class bears the brunt of this system. With marginal tax rates of nearly 50 percent in the lower and middle income brackets, they effectively pay a poll tax, while very low and very high incomes are relatively relieved. Bracket creep exacerbates this burden year after year unless continuous countermeasures are taken.

Germany works dramatically less than other countries – not out of laziness, but because the system creates perverse incentives. Structural deficiencies in childcare, tax disincentives through joint taxation of married couples and mini-jobs, high benefit withdrawal rates, and bureaucratic burdens form a web of obstacles that stifles performance instead of rewarding it.

While the political class acknowledges the problem verbally, it shies away from consistent reforms. The distributional conflicts are too great, the interplay between taxes, social security contributions, and transfers too complex, and the short-term fiscal costs of relief measures too painful. The debt brake acts as an additional obstacle to structural reforms.

Without fundamental reforms, Germany risks falling into a performance trap: declining working hours coupled with a shrinking workforce, skilled workers emigrating, stagnating productivity, and a middle class increasingly doubting whether the welfare state still represents its interests. The question is not whether Germany can afford to increase performance. The question is whether it can still afford to systematically penalize performance.

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