13 Myths: True or False - What is Known about Inequal­ity

The question of whether incomes and wealth in Germany diverge too much - or not - always causes a lot of excitement. For a long time, this was also due to the fact that there were hardly any indisputable official statistics. Now there is more data - and increasingly consensus among experts as to what is true and untrue.

• Is it true that income inequality in Germany has not increased since 2005?

  It is true that overall income disparities have not significantly widened since the mid-2000s. The inequality in available household income, measured statistically by the Gini index, was just under 0.29 in 2005 and increased to 0.296 in 2019 (1). This represents a slight increase over the years. Values of 0 indicate complete income equality, while a value of 1 represents absolute income inequality. There was a slight decrease in inequality in the years after 2015, which is likely attributable to the introduction of the minimum wage.

  However, it is also true that inequality had risen dramatically before, and there has been no correction. From the mid-1990s to 2005, the Gini coefficient for available household income increased from below 0.25 to nearly 0.29. Similar trends emerge when comparing top and average incomes. The share of the top ten percent of households in total income reached 40 percent in the mid-2000s, whereas it was only 30 percent in the late 1960s. During this time, the share of the bottom half of households decreased from 30 percent to just 16 percent (2). In 1998, the annual incomes of the top ten percent were eight times higher than those of the bottom, and by 2010, it was fifteen times higher.

  This assessment is particularly noteworthy because unemployment in Germany has significantly decreased since 2005. Given that millions of people have found paid employment since then, one would have expected a more pronounced reduction in inequality. Apparently, there are deeper underlying causes. If incomes continue to diverge significantly, it is partly because the proportion of people working part-time (either by choice or necessity) has increased since the 1990s. Their monthly or annual incomes are naturally smaller due to fewer working hours. Immigration also plays a role, as a disproportionately large number of refugees work in lower-paid jobs due to a lack of relevant qualifications.

  When measuring inequality by hourly wages (rather than monthly or annual incomes), it has indeed decreased, with the most significant decline occurring after the introduction of the minimum wage. However, there was a substantial increase between the mid-1990s and mid-2000s that has not been completely reversed.

• Does the minimum wage help little against inequality and poverty?

  Since 2015, the differences between high and low hourly wages in Germany have been lower than in the preceding period. At the beginning of the decade, the top ten percent of wage earners had about four times the gross hourly wage of the bottom ten percent. Since 2015, this ratio has decreased to 3.4. Additionally, the dispersion of (employment) incomes at the lower end of the distribution has significantly decreased. All of this suggests that the introduction of a minimum wage of 8.50 euros per hour in 2015 has contributed to reducing inequality (3). Extensive studies now also confirm this (4). Contrary to what critics had predicted, the introduction of this wage floor did not lead to a mass loss of jobs, which would have hindered the reduction of inequality (5). Since the mid-2010s, according to standard calculations, the risk of poverty in Germany has not increased further, but it has also not noticeably decreased. Due to significant real wage losses during a period of historical inflation, the poverty risk rate has even risen again since the COVID-19 pandemic.

• Germany spends nearly a third of its gross domestic product on social welfare. Can it really be so unequal?

  Indeed, Germany is one of the countries with relatively high social spending within the EU and worldwide. However, high social spending doesn't automatically imply that income and wealth are equally distributed. It's even possible that a country has to spend a lot on social welfare precisely because market conditions are highly unequal. This is indeed the case in Germany. The extent of redistribution (or the need to redistribute to address unequal conditions) can be seen when comparing gross and net earnings. When measuring inequality using the common Gini coefficient, the monthly gross incomes in Germany for 2020 had a value of 0.37 (0.46 for annual incomes) (6). Taking into account taxes and contributions, which represent the redistribution, the level of inequality in the corresponding net incomes decreases to a Gini coefficient of 0.29. Even this value, however, has increased significantly compared to earlier times and is above the EU average. Without redistribution, Germany would be among the countries with the most unequally distributed incomes in all of Europe (7).

• Has wealth inequality in Germany not worsened after all?

  There are quite contradictory statements circulating in Germany regarding the development of wealth inequality, including the claim that there has been no worsening. This confusion can be clarified. While it is true that the often-cited Gini coefficient, which attempts to measure distribution in a single value, remained relatively stable for Germany's wealth between 2004 and 2019 (8), this index is less suitable for measuring wealth inequality compared to income distribution. The index mainly measures statistically how much the distribution among those who possess wealth changes, but many people do not have any wealth.

  In reality, over the past 20 years, the gap between the rich and those who have very little or no wealth has drastically increased (9). While the top ten percent were able to double their wealth since reunification, the wealth of the lower half increased by less than 10 percent. This divergence is better captured by measures of disparity than by the Gini coefficient, such as the measured gap between the top and bottom. For instance, in 1993, the average wealth of the top ten percent was already 50 times higher than that of the lower half; by 2018, it had increased to 100 times more – a doubling that the Gini index does not reflect accurately. Another measure also highlights the trend: the already small share of the lower half in total wealth decreased from more than 5 percent in 1993 to less than three percent.

  In other words, when measured comprehensively, the wealth gap between the rich and the poor in Germany has actually significantly worsened since 1993. The reason the Gini index has not increased much is mainly because the middle class, particularly homeowners, were able to keep up with the top wealth holders (who mostly invest in stocks) thanks to the strong increase in property prices (10). This prevented the gap from widening between the upper categories.

• Do we even know how much wealth the richest have?

  For a long time, there were only very incomplete data on wealth distribution. This was mainly because official statistics on this matter were somewhat neglected, and it was challenging, for reasons like data privacy, to determine the wealth of the super-rich. Since the wealth tax was suspended in 1997, Germany lost the ability to collect data through tax assessments. To fill these data gaps, international researchers like Thomas Piketty, Emmanuel Saez, and others attempted to use surveys and analyses of tax and inheritance data. In Germany, researchers from the SOEP (Socio-Economic Panel) also attempted this, although it proved challenging because many individuals did not respond to surveys. In recent times, data derived from the list of the richest 100 Germans, regularly compiled by Manager Magazin, have also been incorporated.

  With each new round of estimations, it became apparent that the existing data underestimated the extent of wealth concentration at the top. According to conventional surveys, Germany had a Gini index of 0.71 in 1993. When additional wealth is recorded based on official household surveys, as is the case in common SOEP surveys, the Gini index for 2019 is noticeably higher, at 0.78. Even in these surveys, very high wealth levels are incompletely captured due to insufficient responses. If a separate sample of the wealthy is included, the Gini coefficient in the SOEP reaches 0.81. When incorporating insights from the ranking of the richest individuals, the index reaches an even higher value of 0.83 (11).

• Aren't Friedrich Merz and Olaf Scholz rich?

  There was quite a stir some time ago when politician Friedrich Merz classified himself as part of the "upper middle class", and Chancellor Olaf Scholz described himself as "not rich" (12). According to analyses by researchers at the University of Hanover, it is not uncommon for people to perceive themselves as less affluent than they actually are, but it drew particular attention in the case of these two politicians. In reality, neither in Germany nor internationally is there an accepted measure for determining when someone is "rich."

  According to a classification by the Institute of German Economy (IW), a one-person household earning more than 4,400 euros net per month is considered "relatively rich". However, this category is open-ended, meaning even much wealthier individuals with, for example, a six-figure monthly income, could also be considered "relatively rich".

  A better way to measure wealth is to compare each person to the rest of the population. According to official statistics, a one-person household with a monthly net income of 3,892 euros is among the top 7 percent of the population in terms of wealth (13). This is roughly double the monthly income of someone in the middle of the income distribution (median income). With an annual income of approximately 360,000 euros (14), the Chancellor even falls into the top 0.1 percent of income earners (15). If that's not considered rich, what is?

• Do Germans not effectively have much more wealth through their pension entitlements (than others)?

  Aren't (most) Germans actually much richer when you consider that they can generally rely on receiving statutory retirement benefits in their old age? In contrast, elsewhere, such entitlements do not exist, which is why people in those places tend to save more and accumulate their own wealth – albeit with lower contributions to pension insurance.

  It's undisputed that statutory retirement benefits represent a form of wealth. However, what difference does it make? Experts from the DIW Berlin estimated for the first time in 2023 the comprehensive impact on the distribution of wealth if pension entitlements were factored in as de facto wealth. The average wealth in the lower half of the population would increase from just under 30,000 to 94,000 euros, and their share of total wealth would rise from 2 to a notable 9 percent.

  Conversely, in an extended wealth calculation that includes pension entitlements, the share of the top one percent would decrease from 30 to 20 percent; for the wealthiest individuals, pensions make up only a small portion of their wealth. Similar findings were suggested by earlier estimates. When measured by the Gini coefficient, which attempts to represent overall inequality as a single value, inequality in Germany would decrease by about a quarter with the inclusion of pension entitlements. Thus, Germany would indeed be less unequal, thanks to statutory pension entitlements. However, it would still be more unequal than many other countries. According to the DIW's 2023 estimates, wealth extended to include pension entitlements in Germany would be nearly 850 percent of incomes. Without this adjustment, it would be 570 percent, which is considerably higher than in the United States (540 percent) and Sweden (500 percent); France also stands at 570 percent (16).

• Is it true that Italians are actually much richer than Germans?

  This caused a stir in the aftermath of the Eurozone crisis when the European Central Bank released statistics showing that the wealth of some crisis-ridden countries was sometimes significantly higher than that of Germany (17). However, this is only true at first glance. For Italy, a relatively high wealth value is only evident when calculating the median. This is the income that the household in the exact middle between the wealthier and poorer halves of the population has. According to ECB data for 2020, this median wealth in Italy was indeed higher at 132,300 euros compared to Germany's 70,800 euros.

  The deceptive nature of this value becomes clear when you calculate the simple average of net wealth instead. Suddenly, Germany is no longer lagging behind but is relatively far ahead, and Italians, on average, have 214,300 euros, making them poorer rather than richer than Germans, who have 232,800 euros on average. When Germans have a relatively high average wealth but a relatively low median household wealth, it mainly indicates that wealth is much more concentrated among the top wealth holders in Germany, unlike in Italy, where it is more evenly distributed but with lower averages. The difference between the median and the mean is nowhere greater than in Germany, which means that Germany has the largest domestic wealth gap in the Eurozone (18).

  The fact that Italians accumulate relatively more wealth is also due to the higher rate of homeownership in Italy. Additionally, there is less social security in Italy, which leads Italians to save more for security. Conversely, Germans can utilize social and cooperative housing, which is not considered private wealth (19).

• Is inequality good for a country's performance and economic growth?

  During the heyday of market liberalism, it was believed that inequality was economically beneficial because it motivated the poor to work harder. Why would inequality be economically detrimental in such a case? Almost fifteen years ago, the book by the British authors Kate Pickett and Richard Wilkinson created a stir in which they explained how highly unequal conditions in a society adversely affect the health and life expectancy of everyone, not just the poor but also the rich. Recent studies by the OECD conclude that countries with less inequality tend to experience more economic growth than others (20). Experts from the International Monetary Fund (IMF) were able to confirm this but with a slight caveat: income inequality begins to have a significantly negative impact on the economy once it reaches a certain level, which occurs at a net Gini coefficient (after taxes and transfers) of about 0.27 (21). According to IMF estimates, many European countries, including Germany, also experience negative effects when inequality rises; it tends to dampen economic performance. However, these findings are not without controversy.

• Do rich people also vote for populists? Does this have anything to do with inequality?

  The fact that populists have been gaining support in wealthier countries for years may seem unrelated to wealth and poverty. However, it's not that simple. After all, it's not only the poor who vote for populists. Really? Analyses of elections reveal that parties like the AfD in Germany tend to receive significantly higher support from blue-collar workers on average. Studies also consistently show that populists or far-right parties are disproportionately elected in regions that have experienced significant economic and social disruptions. This holds true in the United States, according to analyses by authors like David Autor; Donald Trump decisively won in the Rust Belt, a struggling automobile region. Brexit, according to research by Thiemo Fetzer, was decided in the industrial regions of northern England. In East Germany, the AfD, according to studies by the Institute of German Economy (IW), is strongest in the industrial regions that have been affected by structural changes (22, 23, 24). As found by populism researcher Robert Gold in a study, successful regional policies in the EU have a moderating effect on the inclination to vote for far-right parties. In all of these cases, the absolute level of inequality is not necessarily the decisive factor. Rather, it's the fact that people in areas experiencing structural upheaval may feel they are losing control over their destinies. Out of anger and desperation, they may then tend to vote for populists.

• Would a wealth tax alleviate inequality - and if not, what would?

  What would be the most effective way to address the concentration of wealth among the richest and help others accumulate more wealth? In political debates, demands for (higher) wealth or inheritance taxes dominate this discussion. However, there has been little solid information on how much such measures would actually change wealth distribution when the wealthy pay higher taxes. To gain a better understanding of these effects and quantify them, the Forum New Economy conducted an extensive project with intensive scientific guidance, creating simulation models. According to these models, the often suggested one percent wealth tax, for example, would hardly make a measurable difference in the shares of the rich and poor in the overall wealth distribution. A more significant effect could be achieved by implementing a social inheritance, where a sum is transferred to every 20-year-old that can be used for education or retirement planning purposes. With a higher sum, this would noticeably alter wealth distribution over ten years. However, such a measure would naturally be more expensive for the government. Conversely, a one percent wealth tax would generate revenue for the finance minister. You can find the complete results, including the wealth simulator, on the homepage.

• Would an inheritance tax drive many businesses into bankruptcy and endanger Grandma's house?

  In the commonly proposed inheritance tax plans, wealth up to a relatively high threshold is always exempt from taxation, with corresponding exemptions in place. In practice, there are numerous exceptions, thresholds, and special provisions today to exempt family assets such as primary residences or small businesses. This has led to relatively high exemption thresholds of 400,000 euros for children and 200,000 euros for grandchildren. Moreover, individuals often pay a lower tax rate on inheritances and gifts exceeding 20 million euros, and many heirs of businesses remain entirely tax-free (25). According to analyses, between 2009 and 2020 in Germany, 12 percent of all tax-free business transfers were made to children under the age of 14. Therefore, it is now more of a consensus among experts and across party lines that it is urgently necessary to consistently collect inheritance tax again - without endangering Grandma's house (26).

• Do the richest people in Germany not already pay the most taxes?

  The German tax system is designed so that wealthier individuals pay more taxes than others. As income increases, so do the tax rates on each additional earned euro. This is intended to ensure that those with very high incomes contribute a larger share to the overall tax revenue. In fact, the wealthiest ten percent of the population pay more than 50 percent of the income tax (27). Behind this, of course, is the phenomenon of highly unequal distribution. After all, 28 percent of employees earn so little that they fall below the tax-free thresholds and pay no taxes at all. Consequently, the tax share of those with higher incomes is larger simply because they have more.

  In reality, individuals with very high incomes usually pay significantly less in taxes than they should according to the tax rates. This is because wealthier individuals have more opportunities to legally (or illegally) avoid taxes. As a study by Gabriel Zucman and colleagues has shown, it is primarily the super-rich who engage in tax evasion: according to their research, the richest 0.01 percent of the population manage to divert more than 30 percent of their taxes away from the treasury. These figures are based on three Scandinavian countries. As the authors point out, in other European countries, including Germany, there is an even higher proportion of offshore accounts abroad, which likely indicates an even higher percentage of tax evasion than in the three Nordic countries (28).