ESome points had already leaked out on Monday, now there are details on the planned reduction of the so-called cold tax progression directly from the Federal Ministry of Finance: The key values of the income tax rate are to be adjusted to inflation through an “Inflation Compensation Act” – in the first step on January 1, 2023 and in a second on January 1, 2024. This means that taxpayers will probably benefit from EUR 10.1 billion in relief in the coming year and EUR 17.5 billion in the following year.
The draft to be approved for this purpose in the autumn by Finance Minister Christian Lindner (FDP) is now available. According to the interpretation of his house, however, strictly speaking, this is not a tax relief at all, because the reduction of the so-called cold progression will only prevent an unjustified creeping additional burden on taxpayers. It describes the fact that rising nominal incomes are subject to rising tax rates in the case of income tax, even if the incomes do not bring their recipients any additional purchasing power due to inflation. To compensate for this, the income thresholds of the tax scale are increased from time to time in line with inflation.
However, one point in Lindner’s legislative proposal stands out, which must also be seen against the background of political resistance to tax relief in the SPD and Greens: According to his plans, the income limit from which the so-called rich tax rate of 45 percent is due should not be adjusted this time, but excluded – different than usual and different than Lindner’s predecessor as finance minister, Olaf Scholz (SPD), practiced last time, but at that time inflation was still low and the effect of cold progression was correspondingly rather small.
The planned exemption is an argument against political objections that top earners benefited particularly strongly from tax cuts. According to the ministry, this view ignores the fact that high-income citizens pay by far the most income tax – for this reason alone the relief effect, expressed in euros and cents, is higher in the upper income brackets. For further classification, the ministry also refers to a percentage view of the relief effects. This calculation looks like this: For taxpayers with an annual income of 15,000 euros, the current legislative proposal will reduce the amount of the annual tax burden by a good 10 percent in 2023 alone. With an annual income of EUR 30,000, the tax burden falls by almost 4 percent and with an annual income of EUR 250,000 by less than 1 percent.
Specifically, it is planned to increase the basic annual allowance from EUR 10,347 to EUR 10,632 and then to EUR 10,932 in 2024. The threshold above which the regular top tax rate of 42 percent is due increases from EUR 58,596 to EUR 61,971 and then to EUR 63,615. On closer inspection, it is noticeable that this threshold percentage increases more than the basic allowance. This is due to the fact that the traffic light coalition had increased the basic allowance retrospectively to January 1, 2022 as part of a first relief package in spring, from originally 9984 euros.
Politically, Lindner’s plans meet an environment in which the SPD and Greens are more likely to make further direct payments from the state budget to those on low to medium incomes. Such a policy as a substitute for compensating for inflation-related tax increases is considered wrong in the Ministry of Finance for fundamental, systematic reasons: Anyone who wants to fundamentally change the distribution of burdens between taxpayers must do so by fundamentally changing the income tax law – and not by omitting the Inflation compensation and bring about new direct payments through the back door. The Association of German Chambers of Industry and Commerce (DIHK), meanwhile, had increased the pressure in the opposite direction: it is calling for the cold progression to be reduced with effect from 2022.