Berlin Federal Finance Minister Christian Lindner (FDP) wants to relieve citizens and companies significantly more in the next two years in order to compensate for the “cold progression”. To this end, he improves the Inflation Compensation Act.
Because of the higher inflation, the government is planning a tax compensation of 15.8 billion euros in 2023 and 29.3 billion euros in 2024, according to the Ministry of Finance.
One speaks of cold progression when taxpayers move to a higher tariff level and transfer more to the tax authorities, even though their increase in income only compensates for inflation. They are therefore burdened more heavily by the state, although they can no longer afford it. This effect is particularly serious in times of high inflation.
Lindner had already announced that he did not want to become a winner of inflation and would therefore return this additional income to citizens and companies. He had presented the corresponding inflation compensation law in the summer.
At that time, the federal government still expected inflation of 5.8 percent in 2022 and 2.5 percent in 2023. It is now assuming 7.2 and 6.3 percent, respectively.
45 billion euros to compensate for the cold progression
Accordingly, Lindner now wants to improve the tax corrections, even if this is significantly more expensive for the tax authorities. In the summer he had expected a total volume of 30 billion euros for the years 2023 and 2024. The key points now provide for 45 billion euros, the ministry said.
>> Read here: Cold progression burdens taxpayers with more than 41 billion euros
Specifically, the Ministry of Finance is planning to raise the basic tax-free allowance. No taxes have to be paid up to this limit. In the coming year, it is expected to increase from the current 10,347 to 10,908 euros. An increase to 11,604 euros is then planned for 2024. The child allowance is also to increase, from the current 5,260 euros to 6,384 euros in 2024.
In addition, Lindner’s proposal provides for a shift in the tax rate. This means that the higher tax rate only applies to higher incomes. This becomes clear with the top tax rate of 42 percent. This is currently due at an income of 58,597 euros. In 2023 it would only have to be paid from an income of 62,826 euros and in 2024 from 66,778 euros.
Sample calculations: between 405 and 1328 euros relief
The Treasury has run through examples of what all of these changes would bring to taxpayers. A single person with a monthly income of 2,400 euros would save 197 euros in the coming year and a further 208 euros in 2024. With an income of 13,000 euros per month, the effect would be 674 euros in 2023 and an additional 664 euros in 2024.
Families would benefit even more from the changes due to the child allowance. A family with two children, where both parents work and earn a total of 2,600 euros a month, would save 662 euros in 2023 and a further 214 euros in 2024. In total, she would therefore pay around 836 euros less in taxes in 2024 than at present.
For a family with two children and a monthly gross wage of 5506 euros, the relief would be 874 euros in 2023 and a further 456 euros in 2024. In total, the family would be relieved by 1328 euros.
Avoiding a secret tax increase
Strictly speaking, however, it is not a question of reducing taxes, but of avoiding a burden. According to the Ministry of Finance, the numbers correspond exactly to the effect of cold progression.
If there were no compensation, a family would have to pay as much tax on the monthly income of 5,506 euros in 2024 as in the current year, although they could afford significantly less of it because of inflation.
>> Read here: 126.4 billion euros in additional revenue – the state is the big beneficiary of inflation
With the changes to the tax rate, Lindner wants to prevent the state from becoming the winner of inflation at the expense of the citizens. However, not everyone in the traffic light coalition sees it that way. The Greens and parts of the SPD do not want to do without the inflation-related additional income of the state. They argue that higher earners benefit more from compensation for cold progression.
Dispute in the traffic light coalition
Lindner had accommodated the Greens and SPD in the Inflation Compensation Act. So there should be no additional compensation for high incomes. The so-called wealth tax rate of 45 percent should also remain unchanged. According to the plans of the Ministry of Finance, it will continue to be due from an annual income of 277,826 euros.
Nevertheless, Lindner’s plan to expand the compensation for the cold progression with the new inflation figures should cause discussions in the traffic light coalition. The law is already in the Bundestag. The coalition factions must therefore change it accordingly in the parliamentary process. Lindner wants to present a formulation aid for this, which should go into the cabinet next week.
The Ministry of Finance points out that the SPD, Greens and FDP agreed in the coalition committee in September to amend the law. According to the decision, around 48 million taxable citizens, employees, pensioners, the self-employed and entrepreneurs would benefit from the reduction in cold progression. And further: “If the progression report and subsistence level report are available in the fall, the values will be adjusted.”
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