Can a country function without income tax

How does our income tax system work?

Everyone who earns money in Germany takes part - although very few know how it works: our income tax system. Those who earn little pay little income tax and those who earn a lot pay more, that's the motto. But what sounds simple is actually quite a complicated construct. We'll explain how it works, starting from scratch.

When do I have to pay income tax?

The question already suggests: Income tax is only due above a certain amount. More precisely, it will be 9,744 euros in 2021. If your income is below this value, you do not have to pay any taxes. This is the so-called basic allowance and this is increased regularly. Conversely, this means that income tax is due from the 9,745th euro.

It is very important with this calculation that your earnings and income are not identical to your income. That means: What is written on your income tax certificate, for example, is only an initial value. If you file an income tax return, you can reduce this value. Only what is left in the end is subject to income tax. Therefore, this final value is also called taxable income.

How is the income calculated?

In order to determine your taxable income, i.e. the money on which you ultimately have to pay income tax, the tax office needs several steps. First, it gets an overview of your income and checks what other income you had. That means: Not only your salary as an employee is important but also, for example, your income from capital assets or renting and leasing. Any income-related expenses and allowances are deducted from this and a total of your income is determined from this. Then the tax office will take a closer look at your income tax return and deduct your special expenses, extraordinary burdens and other items from your income. Only then is your income known. If you are entitled to a child allowance, this will be taken into account in the last step. At the end of this calculation you will finally find your taxable income.

You can find out exactly how this works in our article Income, Income, Income - This is how your income tax is calculated.

What is the income tax rate?

"How much tax do I have to pay on my income now?" You are probably asking yourself. The answer: It depends on how much you get together. The tax authorities formulate this somewhat more formally: It depends on your "performance". The rule of thumb for this is: Those who earn more must also give a larger part of their income as tax. He is "more efficient".

How much tax there is on your annual income is calculated using the income tax rate. And this income tax rate is a progressive tax rate. That means: The personal tax rate increases with increasing taxable income.

The income tax rate begins in the zero zone, the basic tax allowance. Until then, 0 percent income tax will be paid. According to this, the income tax rate is between 14 percent and 42 percent. This means that if you have very little taxable income, you only have to pay 14 percent tax on it. If you are a top earner, you pay the top tax rate of 42 percent or 45 percent.

What does marginal tax rate mean?

The marginal tax rate, also known as the marginal tax, reflects the tax rate at which the next additional euro of the current taxable income is taxed. That means: Below 9,744 euros, the marginal tax rate is zero, after which it increases from the initial tax rate to the maximum tax rate.

The marginal tax rate is particularly interesting when you increase your salary, because your share of the income is taxed according to different tariff levels. If your income rises, it is possible that the new income components will be taxed higher than the previous components and the salary increase will evaporate. With the marginal tax rate, you can determine which tax rate is at the top of your current taxable income, i.e. what happens if you get one euro more than before.

How is the marginal tax rate calculated?

Since calculating the marginal tax rate is quite complex, it can be helpful to use an income tax table or the Federal Ministry of Finance's income tax calculator. We'll give you an example of how to read the data there correctly and what to do with the result. We leave out church tax and solidarity surcharge for this calculation:

Christoph is single and has a taxable income (zvE) of 20,000 euros in 2021. He has to pay 2,266 euros in income tax for this. That is 11.33 percent of his income, called the average tax rate. In the next year he will receive a raise of 100 euros a month, i.e. 1,200 euros a year. This climbs his average tax rate to 12.18 percent. He has to pay € 2,583 income tax - € 317 more than before the raise. Of the 1,200 euros, around 26.4 percent go to the Treasury and only 883 euros come to Christoph's account.

Our tip:

You can invest a salary increase in training or other income-related expenses and hiring a cleaner could also be an option. You benefit twice as a result, because you can deduct the costs for work and household-related services from your tax. Or you can ask your boss to convert 44 euros of your raise into a voucher for you. This money then remains tax-free. Bottom line: your taxable income goes down and you get more of your raise instead of paying it to the tax authorities.

What is meant by average tax rate?

As can already be seen from the example above, the average tax rate is the percentage of income tax on total income. So not just the individual euro, as with the marginal tax rate, but the total amount of taxable income.

For example, if you have an income of exactly 15,000 euros in 2021 and are single, you will pay 1,010 euros in income tax. That is 6.73 percent of 15,000 euros. That 6.73 percent is your average tax rate.

On the other hand, if your income in 2021 was only 9,752 euros, the marginal tax rate for single people would be around 14 percent, but in fact you only pay 1 euro income tax. Because only the 8 euros above the basic tax allowance are taxed at the tax rate of 14 percent. This corresponds to an average tax rate of just 0.01 percent on your total income.

By the way:

Is this all too complicated for you? As part of a membership, our consultants can calculate in advance the average tax rate you will be charged with. You can find a counseling center near you on our counselor search.


This is an editorial text from the VLH editorial team. There is no advice on topics that are outside the tax advisory powers of an income tax aid association. Consulting services in specific individual cases can only be provided within the framework of the establishment of a membership and exclusively within the advisory authority according to § 4 No. 11 StBerG.