Inflation is eating away at the wallet. Big wage increases don’t help either. Because in addition to inflation, cold progression is also pulling up wage increases. Although cold progression could be abolished, the state would have to forego “free” billions.
Inflation is climbing inexorably. The Federal Statistical Office reported an inflation rate of 7.9 percent for the month of May. The last time prices rose so sharply was in the winter of 1973/74, during the first oil crisis. The sometimes sharp price increases are particularly visible to consumers at gas stations and supermarkets – but also indirectly on the pay slip. The gross salary increases to compensate for inflation are only partially received net.
This is due to the “cold progression” – i.e. the additional tax burden in a progressive tax system if this is not adjusted to the rate of price increases. In other words: Despite a salary increase, the employee can afford less because his average tax burden increases.
If the state were to clean the tax system of the cold progression, it would forgo billions in additional income from inflation – corresponding to “free” billions. According to a study by the German Economic Institute (IW), which is available to FOCUS Online, a broad relief for taxpayers would cost the state around 15 billion euros. According to IW tax expert Martin Beznoska, the federal government can afford it: “The state is taking more income tax this year anyway due to the cold progression. Broad relief is therefore justified – the costs totaling 15 billion euros would be affordable.”
The Federal Minister of Economics, Robert Habeck (Greens), meanwhile, only wants to exempt small and medium-sized incomes from the cold progression. As he explained to the “Welt” in an interview, high-income people should pay the compensation for the cold progression. According to the Federal Ministry of Finance, the top tax rate would have to rise from 42 to 57.4 percent.
A person with an income of 150,000 euros – what one earns, for example, in the middle management of a large corporation – would have a tax burden that is about 20 percentage points higher, according to calculations by the IW Cologne. The state, which is the real beneficiary of the cold progression, would continue to keep the inflation-related additional income.
It would even be possible to abolish the cold progression without great effort or redistribution. All that is needed is an indexation of the tax system – i.e. the integration of the inflation measure into the tax calculation. The tax rate, also known as the “tariff on wheels”, automatically adapts to price developments.
In other countries, the inflation rate is already an integral part of the tax rate or is to become so in the near future. In Austria, for example, the government announced this week that, in addition to monetary payments and adjustments to state benefits to relieve citizens, they also want to abolish cold progression. The German-speaking neighboring country is struggling with inflation that is similar to that in this country.
Switzerland, which currently only has a price tax of around three percent, indexed its tax system ten years ago. As the “NZZ” explains in an article, it is taken for granted there that the state has no right to additional income caused by inflation.
However, indexation of the German tax system is currently not an issue in the political discourse. Politicians are trying to support citizens with immediate measures such as the tank discount or the 9-euro ticket. Indexing the tax system would counteract the loss of purchasing power at least as well. The bottom line is that the taxpayer would have more of the salary increase. For this, the state would only have to be willing to give up its “free” billions.
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