Income tax and inflation: taxpayers should be relieved of 10 billion euros

A rising tax burden, although purchasing power is falling: If Federal Finance Minister Christian Lindner (FDP) has his way, this nuisance will be defused at least from 2023 onwards for millions of inflation-plagued taxpayers.

As announced by his ministry on Monday, Lindner intends to present details of his plans for a new relief package shortly.

A reduction of the so-called cold progression, starting next year, should be a central building block.

According to a report by "Spiegel", Lindner is planning a relief volume of a good 10 billion euros for 2023 and around 4 billion euros for 2024. The ministry did not want to comment on these figures on Monday.

Dietrich Creutzburg

Business correspondent in Berlin.

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The problem of cold progression arises especially when wage increases for workers only partially offset inflation-related increases in their cost of living.

Because of the increased nominal income, more taxes are then deducted as a result of the progressive tax rate, although their purchasing power has fallen due to inflation.

Within the traffic light coalition, however, there has been considerable resistance from the SPD and the Greens to Lindner's plans to offset this effect by making changes to the tax rate before the year after next.

On the other hand, the Association of German Chambers of Industry and Commerce (DIHK) has increased the pressure in the opposite direction: the relief must not wait until 2023, but must come into effect this year, warns DIHK boss Peter Adrian.

He calculated that the cold progression would burden taxpayers with 10 billion euros as early as 2022.

This requires a retrospective change in the tax rate for the year as a whole - similar to what the traffic light coalition had already done with its first tax package in spring.

At that time, the basic allowance and employee allowance were increased retrospectively as of January 1st.

The basic allowance should increase

According to the initially unconfirmed report by “Spiegel”, the plans envisage withdrawing the basic tax allowance from the current 10,347 euros in the year to 10,633 euros on January 1, 2023 and then to 10,933 euros on January 1, 2024.

At the same time, the concept then provides, among other things, for raising the threshold from which the top tax rate is due.

So far, the tax rate of 42 percent has been levied on annual income above 58,597 euros a year, so in 2023 the limit should rise to 61,972 euros a year and in 2024 to 63,521 euros.

This would correspond to an increase of 5.8 percent in the coming year and 2.5 percent in 2024.

However, there are no plans to raise the threshold for the so-called wealth tax, an increased tax rate of 45 percent on income above EUR 277,825 per year.

Lindner had also indicated corresponding considerations a few days ago.

He wants to make it easier for the SPD and the Greens to agree to the project "reduction of cold progression".

Their main objection is regularly based on the fact that income tax relief also applies to high and high earners, which is unfair.

On the other hand, the corresponding relief is offset by the fact that these groups pay by far the most income tax due to the progressive tariff.

The fact that the basic tax-free allowance has to increase regularly results from the constitutional requirement not to subject income up to the subsistence level to income tax.

However, there is no such specification for the other threshold values.

However, Lindner points out that the tax rate would become ever steeper and the so-called marginal tax would increase, especially for low earners, if the other key figures were not increased as well: additional earnings, for example through salary increases or overtime, would already be "demotivatingly heavily burdened", Lindner had recently said warned in a FAZ interview.

In the "Handelsblatt" on Monday he said: "We shouldn't make the mistake of refusing many millions of people a noticeable and permanent inflation adjustment because a few people begrudge it."

The tax rate currently starts at the threshold of the basic allowance with a rate of 14 percent, then rises steeply in the narrow range up to 14,926 euros per year to 24 percent and from there gradually increases to the top rate of 42 percent.

The increase in the basic allowance goes hand in hand with an increase in the child allowance and child benefit.

According to the report, the latter should increase by 8 euros a month in 2023 and by a further 6 euros in 2024.