The traffic light plans to compensate for the cold progression in 2023. This year, on the other hand, taxpayers have to give up more. Our graphics based on the calculations of the German Economic Institute (IW) show who has to pay how much.

Anyone who wanted to put some money aside in 2022 had a very difficult time. In the end, falling real incomes and high inflation leave most people with little to save. Fueled by the Russian war of aggression against Ukraine, prices in Germany rose by an average of ten percent. And then there’s the cold progression.

Cold progression, to put it simply, an additional tax burden that means that people can afford less despite rising incomes or wages, also consumes people’s financial resources. This phenomenon is triggered by two factors:

The calculations of the Institute of German Economics (IW) now show what effects the dilemma has on each individual. In order to compensate for the additional burden on citizens, the state intends to forgo tax revenue of 14 billion euros from cold progression next year.

However, this does not apply to losses in 2022. “Because the relief in the coming year will only be equal to this year’s burden, the state is delaying the compensation for the cold progression and still provides additional income every year,” write the study authors and IW economists Tobias Hentze and Martin Beznoska. There are even calls to use cold progression as an alternative financing option for the relief packages. “That would be a tax increase through the back door that is not democratically legitimized.”

To counteract this, the experts propose a “tariff on wheels”. This means that the nominal income limits for the tax would increase with inflation. The tariff would therefore move with the inflation rate. “With the tariff on wheels, the state can stop the shift in the tax burden on society. There is no reason not to introduce them in Germany as well,” says Beznoska. “With the currently high inflation rate, the state collects a particularly large amount of additional taxes.”

The Inflation Compensation Act was passed by the Bundestag in November 2022. The measures will come into effect on January 1, 2023. The law is intended to fully compensate for the cold progression. The income limits then shift upwards for many income groups with the expected inflation rate. So if you have received wage compensation for inflation, you no longer have to pay taxes. If the salary remains the same, you will pay less wage tax from January 1, 2023.