Achievement must be worthwhile. In German tax law, this principle only applies to a limited extent. If, in normal times, taxation based on ability to pay is an understandable way of balancing the burden – whoever earns more also pays more – then in times of galloping prices it takes on expropriating traits.
Reason is the cold progression. This is what economists use to describe the effect that occurs when employees end up with less net money in their pockets in the event of a wage increase and inflation. The reason for this is the progressively increasing tax rate, with which the Treasury uses a higher (marginal) tax rate for every euro more wages.
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Politicians don’t have to do anything, they just watch as more tax revenue flows into the coffers. According to the Bundesbank, the Treasury should take in around 13.5 billion euros more this year. Example: The unmarried electrical engineer Marina Mustermann earns 49,200 euros gross per year. After successful salary negotiations, she is to receive 52,890 euros in the future, a wage increase of 7.5 percent. With the current inflation rate of 7.5 percent and the higher tax rate, her new net income would only increase to 38,781 euros and thus mean a real loss of income of 623 euros. Why should the woman make an effort?
Gabor Steingart is one of the best-known journalists in the country. He publishes the newsletter The Pioneer Briefing. The podcast of the same name is Germany’s leading daily podcast for politics and business. Since May 2020, Steingart has been working with his editorial staff on the ship “The Pioneer One”. Before founding Media Pioneer, Steingart was, among other things, CEO of the Handelsblatt Media Group. You can subscribe to his free newsletter here.
Norbert Blüm once called inflation “theft from the little man”. Then the cold progression would be a state-organized raid. Federal Finance Minister Christian Lindner (FDP) now wants to stop this and present a plan after the summer break on how the cold progression can be melted down. Problem: The red-green coalition partners smell flawless capitalism through the back door and threaten to veto it. Green Economics Minister Robert Habeck has already announced his opposition in the cabinet if higher taxes are not due for the wealthy at the same time. SPD leader Saskia Esken publicly complained that “once again, the wrong people” would benefit from the Lindner idea. What she suggests 😀
However, he is not correct: the lowering of the cold progression would not be neoliberal excess, but flawless social policy. In the case of lower and middle incomes in particular, the Treasury is brutal when it comes to wage increases, because the tariffs are particularly steep there. In relative terms, taxpayers in the lower and middle progression zones would therefore be relieved more. Michael Hüther, Director of the Institute of German Economics in Cologne, says: The elimination of the cold progression has the greatest effect where the degree of progression is highest, i.e. precisely in the entry zone of the tariff. The measure is not an improvement in the position of those with high incomes, but fair for the majority of income taxpayers. “
Lindner’s experts in the Ministry of Finance have made initial suggestions as to how not only the constitutionally provided increase in tax allowances can be met, but also an adjustment of the tariff process. The next conflict at the traffic light is therefore inevitable. It’s still worth it for the FDP leader. I would like to give four reasons why the problem of cold progression is particularly big at the moment and how it can be eliminated.
The problem grows as prices rise. Because the unions cannot compensate for the record inflation with wage increases, but the tax rate is based on the higher nominal wage, not on what employees can buy for it.
The Bundesbank’s current monthly report says: “Since the tax burden is linked to rising nominal wages, the collectively agreed tax burden increases when real wages fall.” Her recommendation for fair taxation: “Since price increases weaken productivity, it would be logical to do this with income taxation to be taken into account.”
Even the grand coalition only dared to tackle the problem with the handbrake on. Although the federal government has had to submit a progress report every two years since 2013 and thus quantify the problem in concrete terms, it is up to the Bundestag to decide whether there will be financial compensation afterwards. And if politics is wrong, even a correction is of little use, as could be seen in 2021. The German government was way off the mark with its inflation forecast. The tariff adjustment for 2021 was determined on the basis of the report that was published in autumn 2020. In it, the grand coalition at the time assumed an inflation rate of 1.2 percent. There were 3.1 percent. An automatic adjustment of the tariff to inflation (“tariff on wheels”) is called for every year by economists, but politicians cannot bring themselves to do so.
The former economist Lars Feld now also considers this to be a democratic-theoretical problem: He says: While citizens and companies have to accept real income losses due to inflation, the state achieves real additional income. In terms of democracy theory, however, it is imperative that every tax increase be decided democratically by the Bundestag and not take place secretly. His verdict is harsh: Compensation for progression is only “a return of what the state has appropriated without a democratic decision”.
The experts at the Ministry of Finance are now proposing a blanket defusing of the problem. According to this, the tariff curve could be shifted to the right by 5.76 percent in the lower area in 2023, and again by 2.49 percent in 2024. Should the minister accept the proposals and be able to push them through in the coalition, this would be a short-term and simple, but also expensive, measure. This should cost the federal government alone almost 7 billion euros in the coming year. The secret plan in the finance department: A reserve of around 15 billion euros planned in the budget for tax measures as a result of the Ukraine war could now be used almost entirely by Lindner to reduce cold progression. After all, the federal cabinet has already approved the budget for 2023.
However, the progressive rate structure has a demotivating and performance-inhibiting effect at another point. Namely where the top tax rate of 42 percent intervenes deeply in the middle of society. Contrary to the rhetoric of the left, skilled workers who earn a solid income are now “rich” before tax law. The number of employees who have to pay the top tax rate of 42 percent rose by 800,000 between 2012 and 2018, the last official wage and income tax statistics. This emerges from a response from the Ministry of Finance to a request from the FDP member of the Bundestag Frank Schäffler.
In 2012, only 1.4 million taxpayers were in the top tax rate with their predominant income from non-self-employed work and taxable income from 52,882 euros (or 105,764 euros for joint assessment). In 2018 there were already 2.2 million taxpayers.
Conclusion: The middle of this society is systematically disadvantaged not only in the talk shows and in parliament, but also in the tax and levy system. In a coalition that concentrates on the social extremes – housing benefit recipients and millionaires – one party should keep an eye on the average and the norm. The FDP could be such a party. If she dares.