Eins, Zwei, Zehn: An Expat's Adventures in Deutschland, part 3/10 ????

"no one comes to Germany to make money", multiple people to me, over the years

Preamble on taxes and money

Money is one of those inventions that humanity can't live without. It has fueled progress, started wars, built civilisations, and destroyed empires. There are surely multiple angles but I argue that the huge network of humanity wouldn't be where it is today without it.

So how is Germany's relationship with money? When does it pay off? Let's dig in!

2?/5

How it started

I moved to Germany 10 years ago and salaries were higher than where I was (Belgium) and much higher than in my home Portugal.

Fast forward and through increasing impact and responsibility, I managed to double my income; in the meantime, some of my network in Portugal managed to more than quadruple theirs (essentially, earning way more in Portugal than I did at the same age I came to Germany).

Germany has a GDP per capita (2021) of ~€54.000, which is the 11th in Europe. Good but not great. The issue has to do with disposable income, ie: the amount of money left after all your liabilities are paid.

Why is this? Taxes, contributions, and the cost of living. Let's start with taxes and contributions.

(this analysis is valid for the FTE - full-time employment - case; freelancing is a slightly different case)

Taxes?

Germany has some of the highest income taxes on labour in the OECD, close to 50%. Part of this befalls the employer (making it expensive to have your workforce based in Germany) but the majority is deducted from the employee's payslip.

According to Stepstone, the average salary in Germany was around €51.000 (in 2022). A calculation on how much net that is (calculators abound), for a single person with no dependants will quickly yield something like €32.515, meaning an effective tax of 37% of your gross salary.

This will get worse (spoiler alert, it'll move all the way to 44%) the more you climb the seniority/impact ladder. Let's go with an example of a talented software developer making €80.000/year:

In this example, the worker is forfeiting 40% of their salary for pension schemes, income tax, unemployment subsidy, health insurance, social contributions, and a few more that are all but obscure to the novices in German taxes. Is that a lot for a well-run country? I guess it depends on one's notion of "a lot" and "well-run".

Strangely enough, more than 30 years after the reunification of Germany, there's still a 5.5% tax imposed (Solidarit?tszuschlag) on top of the income and corporate earnings taxes above a certain earning amount. As you work harder to progress in your career, you'll pay more and more of such outdated taxes. Eventually, hundreds of your hard-earned euros will be gone each month (thousands a year!). Baffling.

I remember seeing an opinion piece some time ago where it was argued that the temptation to economic evasion was inversely proportional to the ratio of benefits to taxes one pays: meaning the fewer benefits, the more the "tax-optimisation" instinct would kick in ??. In an example, it was mentioned that a lot of the countries with big shadow economies were a byproduct of the population not seeing the causal effect of their contributions to society. Looking at the chart above, Germany fares pretty well in this regard, at less than 20%, and way below the leaders Kosovo, Montenegro, Bulgaria, or Macedonia.

The German tax system is both straightforward and complex, particularly for immigrants. Complex because officials will often turn down requests for communication other than German (fair from their perspective, I guess) and because there are many details to understand (the word Pauschal comes to mind - lump sum); straightforward because there are multiple online solutions that will empower individuals to fulfill their tax obligations with little effort (see picture below).

Also, the tax system is lenient - meaning it'll allow one to back-fill tax declarations up to 5 years in the past. This sounds fantastic until one understands the reason - the system overcharges by default. So, when doing one's taxes, and getting that much-coveted refund, one is only getting what was rightfully theirs. ?? (notice the average tax refund in the picture below?)

I was told one gets interest on money owed by the Tax Office, although I suspect that interest will be in the low percents, much lower than any opportunity cost that money might have in the hands of a hard-working migrant.

Contributions & cost of living

Although your personal marital status shouldn't influence the proceedings of your work, in practice that's not how Germany works. There are 6 classes and half of those are for married couples. Depending on certain conditions, a couple can make significantly more money (5-10% more per month, rough estimation) by being married. I guess I'd rather earn for my work rather (and not have the government meddle with my personal decisions) than whether I decide to marry someone - but maybe I'm too liberal. What's your take here?

But just how much money does one need? What does the research say? To recap, income tax = potentially bad; shadow economy = bad; GDP = potentially good, and money = potentially good. ??

In expensive cities, like Munich, Frankfurt, or Hamburg, this is even more of an issue. Salaries tend to be higher but accommodation is usually much higher, while groceries and fixed expenses will be at least comparable to other cities.

Then there's the issue of religious tax. When a concept like Separation of Church and State exists (as it's the case in Portugal), it's hard to understand that ticking a box on your tax declaration can lead to a triple-digit deduction from your hard-earned euros. However, I discovered that this separation does not exist in Germany. Thus, one's faith will either cost them, or it's better kept private.?

I was recently in the UK, and for four days, I didn't withdraw a single pound or touch a physical coin/bill. In Germany, besides my groceries (at bigger retailers) and some more modern businesses, chances are that I'll need cash daily if I go to some bakeries, bars, butchers, hairdressers, go to a local market or a big portion of restaurants. This article explains it pretty well, the lowest cashless adoption of the EU might stem from a concept of guilt conflating debt when using anything but cash. Eventually, the adoption of cashless payments might be a good proxy for the success of digitalisation initiatives (and the shadow economy).

There is competition

As demonstrated, gross salaries only make up a part of the equation; it's the net income minus the liabilities that really counts. And one might not need that much as long as society works, there is a good public transport network, safety, schooling options, justice and healthcare systems. All of these matter massively.

But your mileage might vary.

In the last few years, I've seen many friends and colleagues leave Germany for supposedly lower-paying countries - mostly in the southern EU. Some are having slightly less expendable income but some are actually having more, a byproduct of taxes, fixed costs and variable costs of living. ??

Two examples I often bring up are those of 2 offers I extended to 2 senior individuals. They didn't want to come to Germany so I came up with offers for them to work from their home countries of Bulgaria and Turkey. They were value-adding professionals with less than 10 years' of experience. I formulated a comprehensive remote work package and offered what I thought were competitive salaries:

• €55.000/year to the individual in Sofia
• €70.000/year to the individual in Istambul

They both rejected my offers??, stating they were earning more there than my offers. They didn't want to move to Germany for even 20% more of that (I asked), which is understandable. Again, disposable income. I'm sure housing is cheaper in their home countries and taxation is lower. Maybe the roads aren't as good as in Germany. Each individual knows what they value.

Having hired people to move to Germany in the past for less money than that, the leeway wasn't much, paying salaries over 6 figures is relatively rare, especially in the startup/scaleup scene. But this will be an issue for a country with a shortage of talent.

There are cities in the world that pay much more than Germany (big caveat that the high numbers you'll see will leave the safety buffer of socialism - meaning forget about getting sick, forget vacations, paternity leaves, unemployment subsidy and think you might have some drug calamity at the gates). But most will pay less. The topic is complicated and remote work tends to even out things. I don't even fully understand the picture below (courtesy of levels.fyi, adapted):

I will get into more detail when I delve into the Work part of my musings.

Conclusion

Salaries in Germany are decent, though not comparable to the highest-paying countries (like the USA, though do check the caveats) - this will be more of an issue to attract top talent, which Germany desperately needs. If one is already in Germany, then it's a different story.

There are also a lot of taxes - both for employers and employees, some of them falling on personal issues, like marriage and religion. However, taxes serve an important social function and a working state.

The choice of where to make one's livelihood is up to the individual and their unique circumstances.

In the end, it all boils down to this:

"Money can't buy happiness, but it can make you awfully comfortable while you're being miserable."?-- Clare Boothe Luce, 1938.

* Credit to cover picture in the article: https://www.dhirubhai.net/posts/maxwolke_wallet-applepay-visa-activity-7087738388438540288-rFqh