Berlin Inflation hurts the Germans twice over. Not only do you have to deal with higher prices, but the burden of cold progression increases. This is what the creeping tax increases are called, when a salary increase is eaten up by inflation, but the employee still has to pay more taxes due to the higher earnings.
Federal Finance Minister Christian Lindner (FDP) is now making a proposal to change the tax rates so that there is no longer a cold progression. But he wants to leave out a group. “Unlike my social democratic predecessor, I would not change the basic value of the tax on the wealthy,” Lindner told the Handelsblatt.
Lindner’s predecessor, today’s Chancellor Olaf Scholz (SPD), had always adjusted the validity of the 45 percent tax rate for the wealthy during his tenure as finance minister when reducing the cold progression.
In 2018, top earners had to pay the 45 percent for the part of their income that was more than 260,000 euros. In 2022, the 45 percent will only apply from 277,000 euros. Lindner does not want to push the limit further back.
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Christian Lindner makes a proposal to reduce cold progression
However, it is questionable whether he will get through with his offer in the traffic light. SPD and Greens continue to mobilize against the dismantling of the cold progression. They argue that even if the tax on the wealthy is left out, top earners in particular would benefit and that the money should be used elsewhere. “Tax relief in the billions, from which high earners benefit the most – that’s just not up to date,” says Katharina Beck, spokeswoman for financial policy for the Greens, about Lindner’s initiative.
In absolute terms, the reduction of the cold progression would actually primarily benefit the high earners. This is shown by calculations by the German Economic Institute (IW), assuming that the inflation rate will be 7.2 percent this year and will be completely offset.
>>Read more about this: How inflation eats up salary growth
A single person with an annual income of 25,000 euros would then be relieved of 213 euros per year. With an income of 80,000 euros, the plus would be 672 euros. The inflation rate could be even higher, the difference would then be even greater.
Lindner thinks that’s the wrong way of looking at things. “Small and medium-income earners will benefit the most from a change in tariffs,” he says. In the case of above-average incomes, the relief amount in euros is higher, but the tax burden there is even higher overall.
Lindner: “Opponents take the middle of society hostage”
The finance minister’s message to his government colleagues is clear. “We shouldn’t make the mistake of denying many millions of people significant and lasting inflationary compensation because a few are begrudged of it,” he explains.
“The opponents are taking the middle of society hostage because they would like to burden the IT specialist, the heart surgeon and the entrepreneur.” Lindner regrets the “class warlike tone in the debate at times”.
This is also a signal in the direction of Vice Chancellor Robert Habeck (Greens). He had suggested counter-financing relief for lower incomes with higher taxes for upper incomes. Lindner recently had his officials in the Ministry of Finance calculate whether that would be possible.
The question was how much the top tax rate would have to rise if this were to halfway counter-finance a significant reduction in income for lower and middle incomes through a significant flattening of the middle class boom. The middle class belly describes the above-average increase in tax rates in the middle income bracket. Result of the calculations in the ministry: From a taxable annual income of 80,000 euros, the top tax rate would have to increase from the current 42 to 57.4 percent.
SPD and Greens against dismantling cold progression
However, the SPD and the Greens would be right not to touch the cold progression anyway. Federal Family Minister Lisa Paus pleaded in the “Neue Osnabrücker Zeitung” on Saturday to “keep your hands off cold progression and use other levers for targeted support, such as higher child benefits”.
Because one thing is clear: Christian Lindner’s plans are expensive. Due to the high inflation, the compensation would have to be particularly large. And in addition to the cold progression, he wants to increase the basic allowance, and taxpayers should be able to fully deduct their pension contributions from next year.
In the case of progression reduction, the omission of the rich tax benefits Lindner’s proposal somewhat. According to IW, if everyone were relieved, the costs would have been around 15 billion euros. The Minister of Finance is now assuming costs in the high single or low double-digit billions. “In the 2023 draft budget, I made provision for this measure,” Lindner said.
Controversy over relief from cold progression.
(Photo: dpa)
But the money could be missing elsewhere for relief. “From a financial point of view, it is a mystery how the desired debt brake is to be adhered to with this further proposal in the billions,” says Green MP Beck.
SPD proposes direct payments instead of reducing cold progression
The SPD is now making a counter-proposal in the form of direct payments. Your financial policy spokesman Michael Schrodi explains this in a letter to the entire parliamentary group. The nine-page document is available to the Handelsblatt.
Schrodi calculates what it would mean if the billions for the cold progression were paid directly to small and middle-income earners instead: “Around 90 percent of the population benefit more from direct payments than from an income tax cut!” This is also related to the fact that even very low incomes would be relieved because many of them pay no income tax at all.
>>Read also: “Our most dangerous problem is inflation” – Finance Minister Christian Lindner in an interview
Finance Minister Christian Lindner, however, considers this comparison to be the wrong debate. “Reducing cold progression isn’t about relief, it’s about preventing heavier stress.”
The autumn will show whether he will be able to convince his coalition partners of this view. As soon as the federal government’s progress report, which is prepared every two years, is available, Lindner wants to get his proposal off the ground.
More: “There’s going to be a big debate” – Lindner paves the way for the European debt debate