The high inflation will burden income taxpayers in Germany this year and next with a total of a good 41 billion euros. This is the result of the federal government’s tax progression report, which is published every two years and is to be discussed by the cabinet next week. This corresponds to an average amount of almost 1170 euros per person affected, which is solely due to the so-called cold progression. Finance Minister Christian Lindner (FDP) has already announced, however, that he does not want to expect citizens to pay even higher taxes to the tax office in addition to the immensely increased cost of living. Therefore, the inflation effect should be fully compensated by changes to the tax rate.
One speaks of cold progression when employees have to pay more taxes after a salary increase, although their purchasing power has not increased at all due to inflation or has even fallen. The problem is particularly serious when prices rise much faster than wages, as is currently the case, so real incomes shrink.
In the future, the individual tax rates will only apply to higher amounts
According to the progression report, the effect of the federal, state and local governments will flush almost 23.4 billion euros this year and a good 21.5 billion euros in 2023. Converted to the 35.5 million taxpayers in the country, that’s a total of 1,265 euros per capita. The experts at the Ministry of Finance assume that consumer prices will rise by an average of 7.2 percent in 2022 and by 6.3 percent in the following year. Since some smaller reliefs have already been decided, the bottom line is that the state will have additional revenue of around 41.4 billion euros for both years. Every citizen contributes an average of almost 1170 euros to this.
In order to relieve taxpayers according to their individual additional costs, Lindner wants to shift the key values of the entire income tax rate to the right. The individual tax rates, which gradually increase with increasing income, would then only take effect from a higher amount than before. At the beginning of the week it had already become known that the basic tax allowance for adults was to increase from 10,347 to 10,908 euros at the beginning of next year and the child allowance from 5,620 to 6,024 euros. Including the child-raising allowance, a family of four can earn 38,912 euros in 2023 without having to pay a cent in income tax. Only the first euro above this subsistence level is subject to the entry tax rate of 14 percent.
Lindner announced on the short message service Twitter that he wanted to fully offset the burden of cold progression. “The state must not be the beneficiary of inflation. It’s a matter of fairness – the working middle shouldn’t have to endure tax increases through the back door,” he wrote. In the medium term, the minister is aiming for automatic inflation compensation, which experts call “tariff on wheels”. The income limits from which the individual tax rates apply are automatically shifted upwards by the amount of the inflation rate. The problem of cold progression does not arise in the first place. However, in addition to the Bundestag, the federal states still have to agree to all of Lindner’s plans.