Inflation is causing problems for the Germans. Now the traffic light coalition is looking for solutions to cold progression. This is a mixture of rising prices and rising taxes, which are costing workers dearly. What proposals are now in the room.
Inflation is eating up an ever-increasing proportion of salaries in Germany. Anyone who now thinks that they can counteract this with a salary increase is wrong. Those who earn more also pay more taxes. The combination of inflation and a higher tax burden is called “cold progression”. This horror of all workers causes discussions in Berlin. Which measures relieve the citizens the most is controversial in the traffic light coalition.
One would think that a seven percent increase in price could be offset by a seven percent increase in gross salary. Far from it, a higher gross income is also associated with a higher tax burden, according to the Income Tax Act (EStG). More taxes have to be paid not only in absolute numbers, but also as a percentage. This tax law mechanism becomes a problem in times of inflation. In order for inflation to be fully offset net, gross salaries would have to grow faster than prices thanks to rising tax rates. Since they don’t do that, solutions are needed.
In the coalition, the tug-of-war over suitable countermeasures for “cold progression” has begun. A rift is already emerging between the FDP-led Federal Ministry of Finance and the coalition partners from the SPD and the Greens.
Federal Finance Minister Christian Lindner (FDP) wants to link the income tax limits to price developments and at the same time increase the basic tax-free allowance. Flexible tax limits are intended to prevent employees with small and medium-sized salaries from having to pay more taxes after a salary increase.
Lindner’s coalition partners from the Greens and SPD are not very impressed with his project. SPD leader Saskia Esken warned that low earners who pay little or no income tax would hardly benefit from Lindner’s plans. While she acknowledges that the finance minister’s move means relief for middle-income groups, “but the highest earners who do not need our support will benefit,” said Esken. The financial policy spokeswoman for the Greens, Katharina Beck, made a similar statement: “Tax relief in the billions, from which high earners benefit the most, is simply not up to date.”
The SPD and the Greens are therefore calling for “targeted measures” to relieve people with little money. One possible way is direct payments from the state. According to the “Handelsblatt”, the spokesman for financial policy for the SPD, Michael Schrodi, calculated in a letter to his parliamentary group that almost 90 percent of Germans would benefit financially more from direct measures than from tax cuts.
The finance minister does not share the assessment of his coalition partners. “Small and medium incomes will benefit the most from a change in tariffs,” he counters the objections from the SPD and the Greens. Although it is true that above-average incomes are given greater relief in absolute terms, they also carry a higher tax burden. “Small and medium incomes benefit the most in relative terms from a change in tariffs,” emphasized Lindner. And he added: “We shouldn’t make the mistake of denying many millions of people a noticeable and permanent inflation adjustment because they begrudge a few.”
Lindner criticized the “Handelsblatt” that the SPD and the Greens had accepted his tax plans with reluctance and criticized the “class warlike tone in the debate at times.” He made it clear that his tax plans would cost the state the high single-digit or low double-digit billions , to have made provisions accordingly in the draft budget for 2023.
In order to accommodate his coalition partners, the finance minister decided to exempt high earners from the planned measures. “Unlike my social democratic predecessor, I would not change the basic value of the tax on the wealthy,” he told the Handelsblatt. His predecessor, the former finance minister and current Chancellor Olaf Scholz (SPD), had adjusted the scope of the wealth tax rate of 45 percent when the “cold progression” was reduced. While high earners had to pay 45 percent of the part of their income that was over 260,000 euros, the maximum tax rate in 2022 will only apply from 277,000 euros. The Ministry of Finance does not want to move this limit further backwards.
Instead of an income tax reform, the President of the largest German social association “Sozialverband VdK Deutschland e.V.”, Verena Bentele, sees an acute need for action elsewhere: “Before Mr. Lindner makes major interventions in the income tax system, we have a very clear demand on him: the 300 euro energy flat rate must be paid out to all pensioners as soon as possible.”
The President of the Association of Taxpayers (BdSt), Reiner Holznagel, is formulating a specific demand for the federal government to effectively relieve taxpayers: “Especially in view of the current record inflation, it is important to completely eliminate the cold progression in income tax law – and with a “tariff on wheels” and on the basis of current inflation forecasts. The state must not become a profiteer from inflation!”
