Finance Minister Christian Lindner has announced the reduction of cold tax progression for 2023, without going into detail so far. A study now wants to show that this would help top earners in particular. But other economic experts counter that it is also a matter of fairness towards the hard-working middle class.
Cold progression is considered unfair. In the case of salary increases, the state benefits from higher taxes, while a higher tax rate and inflation eat up the increase in wages for employees. Despite a higher sum on the payslip, they ultimately have less purchasing power.
Federal Finance Minister Christian Lindner (FDP) is bothered by this. From next year he therefore wants to improve the cold progression. But a study comes to the conclusion that the approach is not convincing given the lack of relief for low-income households.
The conclusion of the study authors of the Bremen Chamber of Labor: According to their calculations, top earners in particular would benefit from the finance minister’s tax plans. They are the least affected by inflation. Various studies show that those on low and medium incomes are currently more affected by inflation because food and energy make up a larger part of their expenses.
Read more: Lindner’s tax plans relieve top earners the most
Finance Minister Lindner has not yet communicated any precise details for his tax plans, which is why the results of the Chamber of Employers should be treated with caution anyway. But in order to avoid cold progression, the finance minister must, in theory, raise the benchmark income figures above which a higher tax rate applies.
The calculations of the Bremen Chamber of Labor are based on exactly this logic: If Lindner shifts all collective bargaining benchmarks by six percent, according to the Chamber of Labor, that brings a single person with a gross income of 100,000 euros 630 euros. If he earns six times as much, he saves 1120 euros in taxes. A childless couple with this salary even waving 1720 euros relief. In contrast, a family of four with an income of 40,000 euros would only be relieved by around 300 euros, and a single parent with half the salary by 100 euros.
In view of these results, a dispute has now broken out among economic experts and politicians. Some economists criticize the tax cut Lindner is aiming for – before it has even been worked out – and ask whether the reduction of the cold progression is necessary at all. Ultimately, according to her view, the people who would win the most would be those who already have comparatively more or a lot anyway.
But there are also experts who defend the project of the Federal Ministry of Finance. This includes the Munich Leibniz Institute for Economic Research (ifo). Florian Dorn, who has been dealing with the effects of cold progression there for some time, finds the argument that only top earners benefit from their downsizing “a bit too short-sighted”. “If the relief is only considered in absolute terms, that is, in euros per capita, that may be true,” he told FOCUS Online.
However, if you look at the relief from the elimination of the cold progression in relation to the income of those affected and also to the tax burden on households, according to his calculations, middle incomes in particular would benefit the most in relative terms from the reduction of the cold progression. The middle and lower middle of the income distribution bear three-quarters of the burden of additional tax revenue from cold progression.
In fact, Dorn continues to analyze, current inflation is hitting the lowest incomes the hardest and the highest incomes the lowest. “But it is also true that the federal government’s previous relief packages have given the lowest incomes the greatest relative relief,” says the scientist from the ifo Institute. This is done, for example, through a one-off energy price lump sum or one-off payments for recipients of social benefits.
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“It should also be taken into account that rising heating costs for recipients of basic security are offset by the assumption of costs for accommodation,” says Dorn. For him, the dismantling of the cold progression in view of the current situation is a requirement of fairness for the hard-working middle class in Germany. So for exactly the group “that has felt the least relief during the crisis so far,” says Dorn.
In the opinion of the Institute of German Economics in Cologne (IW), the dismantling of the cold progression is not about any tax gifts. “The cold progression represents a secret tax increase. If the income trend of taxpayers does not even compensate for inflation, but the tax burden rises disproportionately, this tax increase should be corrected,” says local tax expert Martin Beznoska to FOCUS Online. The withdrawal of the cold progression is therefore necessary in order not to burden the citizens in addition to inflation. For him, it is about the principle that the state should not be entitled to additional income caused by inflation.
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Therefore, one cannot look at the reduction of the cold progression exclusively in the spotlight of the current crisis, as ifo colleague Dorn goes on to explain. In its study, the Bremen Chamber of Labor came to the conclusion that, given the current situation, direct payments would be far more socially balanced than reducing cold progression in order to help citizens who are currently suffering from inflation.
However, the reduction of cold progression and the associated increase in average exposure have been discussed for decades. It is therefore not about a one-off compensation in view of the current situation, but rather about a fundamental maxim of the income tax rate. “In my view, this inherent effect of cold progression, which can lead to a higher tax burden and growing state revenues at the expense of the citizens and without a parliamentary resolution, urgently needs to be corrected,” says Dorn. Taxation should be based on real income and thus on the actual ability to pay of citizens, which is achieved by reducing cold progression.
The reduction of the cold progression could even be corrected comparatively easily and made fair. “A tax rate “on wheels” should be introduced, in which the tax rate parameters are automatically linked to the development of the price level,” suggests Dorn. In other countries, the inflation rate is already an integral part of the tax scale. Switzerland, which currently only has price inflation of 3.4 percent, indexed its tax system ten years ago.
But the state would have to be willing to give up its “free” money for this – and all in all, there is a lot at stake. For the current year alone, the experts expect income from the cold progression of around 13.5 billion euros due to the much higher inflation rate.
In view of the budgetary situation, things are likely to get heated in the traffic light coalition as soon as the Lindner initiative is seriously discussed.
