Federal Finance Minister Christian Lindner (FDP) is planning a package worth around ten billion euros to prevent additional burdens on taxpayers due to increased inflation. This emerges from the draft for an inflation compensation law, which according to ministry circles is to be brought before the cabinet in September.
The aim is to compensate for the so-called cold progression. This is based on the phenomenon that employees have to pay more income tax even if a salary increase just compensates for inflation. They can then not afford more from their higher gross salary than before the wage increase – they still slip into a higher tax rate.
According to ministry circles, the planned relief effect of the law is 10.1 billion euros in the coming year – the federal, state and local governments will share the corresponding loss of income. In 2024, another four billion would be added. A buffer for possible shortfalls in revenue of a good nine billion euros has already been planned in the 2023 federal budget.
The project is implemented in concrete terms by adjusting the income tax rate to inflation. This means that the basic allowance, on which no income tax is levied at all, will be increased – by almost 300 euros to 10,632 euros. All other basic tariff values will also be postponed – with one exception: the “wealthy tax” will remain where it is. This means that while the top tax rate of 42 percent will only be due from 61,972 euros in future instead of from 58,597 euros as before, the wealthy tax rate of 45 percent will continue to be levied on all incomes above 277,826 euros.
Compensating for cold progression has been common practice for a number of years. Most recently, however, the tax rate for the wealthy was always adjusted as well. Although Lindner now wants to do without it, opponents have already criticized the project as socially unfair. The Greens, for example, had complained that high earners benefited the most; Criticism also came from the SPD and the suggestion that one-off payments for low earners be used instead.
From circles of the Ministry of Finance, however, it was said that a total of 48 million taxpayers benefited – and low earners even particularly clearly. In fact, the increase in the tax rate will have a particularly strong impact on small and medium incomes. Measured in terms of their income, they therefore have the most of it in percentage terms if the state waives the income from cold progression. In absolute figures, on the other hand, high earners naturally benefit the most because they fall under higher tax rates. However, the relief does not increase beyond 62,000 euros: According to the current calculations, it is then 479 euros – regardless of whether someone earns 70,000 euros or half a million.
The justice debate was to be “led offensively,” said Lindner’s house on Tuesday. The reasoning: anyone who wants to impose tax increases on employees who earn more than 60,000 euros via cold progression must accept that everyone with lower incomes will then also be burdened more heavily. They would be taken “hostage”. The tax system also reflects a concept of justice, after all it was decided in a legislative process. If you want to change this structure, you have to use the appropriate political process instead of bringing about changes by doing nothing. Lindner himself had recently always emphasized that the state should not become the winner of inflation when it comes to income tax. From his house, it is also said that it is not a matter of relief, but of waiving higher burdens.
In addition to adjusting the tax rate, the child allowance is also to be raised and child benefit increased. The latter in the coming year for eight euros for the first and second child and two euros for the third. A year later another six euros for the first, second and third child. For all other children, everything would remain the same.
However, the exact values for both income tax and family benefits will change in the course of the legislative process: the new subsistence level report and the next tax progression report are to be presented in the autumn. The draft would be adjusted on the basis of the inflation data then available. The Treasury Department’s previous estimate is rather conservative; the shortfall in revenue is likely to be higher rather than lower.