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Gross income gap has increased since reunification

Press Release of January 16, 2018

The top 10% of income earners in Germany earn almost as much as the middle 40% – the top 1%’s share of national income has increased from eight to 13 percent since 1995.

The share of national income belonging to the top 1% of income earners has grown significantly in Germany since the mid-1990s, while the share earned by the bottom 50% has significantly decreased. These are the main findings of a study by DIW Berlin economist Charlotte Bartels based on income tax data for Germany for the World Inequality Report.

Release of the World Inequality Report 2018 in Berlin

On January 16, DIW Berlin economist Charlotte Bartels will discuss the background and consequences of growing worldwide inequality together with Lucas Chancel, co-director of the World Inequality Lab, and Harmut Kaelble, Senior Professor of social history at the Humboldt University of Berlin.

The event will take place on January 16, 2018, 3 p.m. to 4:30 p.m. at DIW Berlin, Mohrenstrasse 58, 10117 Berlin.

Since the introduction of the income tax at the end of the 19th century, it has been possible to evaluate income tax data, which can show how the amount and distribution of gross income from wages as well as corporate and property income have evolved over time. The data show that although the share of the top 1% has sunk from 18 to 13 percent since 1913, it has increased by 30 percent over the past 30 years. However, the data do not show how government transfers and the progressive tax system level out income differences. "Today's tax and transfer systems reduce inequality much more markedly than one hundred years ago," said Bartels. "However," she said, "the tax reforms of the past 20 years have dampened the redistributive effect of the tax system." Various studies have shown that wealthy households with high incomes were relieved in particular. The World Inequality Report was presented in Paris in mid-December 2017. A more detailed report for Germany that was recently released takes an in-depth historical look at the top 1% of earners as well as the development of the group since reunification.

"At the beginning of the 1990s, the gap between the bottom 50% of earners and the higher income groups had closed somewhat," said Bartels. This was due to, among other things, the fact that many workers in East Germany were profiting from higher wages while few ever actually reached the highest income percentile.

However, the tide turned a bit later when production in the new federal states fell and unemployment rose sharply throughout all of Germany. The share of the national income earned by the bottom 50% decreased from 26 percent in 1995 to almost 17 percent in 2013. During that same period, the share of the national income of the top 10% increased from 32 to 40 percent.

The share of the top 1% has risen

When looking at the top 1%, which is mainly comprised of entrepreneurs, this development is even clearer: their share of the national income rose from eight to 13 percent over the same period. Bartels, however, thinks this value is being underestimated. "If one were to account for companies' retained profits, profits which the companies have increasingly kept since the early 2000s instead of paying out, the income share of the top 1% would be higher." In an international comparison, Germany is currently on par with Great Britain but still far below the U.S., where the top 1%'s share of the national income is about one-fifth.

The overall economic significance of business and investment incomes has also increased parallel to the increase in the share of the top 1% when compared to wage income. If business income and investment income grow faster than wage income, then the already-wealthy profit the most. Since the 1990s, Germany has been developing into an export champion parallel to the growth of the top percentile's share of the national income. This suggests that top earners in Germany who receive most of their income from owning a company profit significantly more from this increase in foreign trade than their employees do.

"If you want to take action against an increasing gap between the market incomes in Germany, then the participation of lower income groups in corporate profits needs to be improved," suggested Bartels.

Charlotte Bartels

Research Associate in the German Socio-Economic Panel study Department