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Cold progression, top tax rate, basic allowance - you can expect these reliefs

Federal Finance Minister Christian Lindner (FDP) had already made sure in September that this sentence was included in the draft of the Inflation Compensation Act: "In the parliamentary procedure, an adjustment of the values ​​that might become necessary would be possible".

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Cold progression, top tax rate, basic allowance - you can expect these reliefs

Federal Finance Minister Christian Lindner (FDP) had already made sure in September that this sentence was included in the draft of the Inflation Compensation Act: "In the parliamentary procedure, an adjustment of the values ​​that might become necessary would be possible".

What is meant are the key values ​​of the income tax rate, so that the so-called cold progression in the coming year is actually compensated for, as promised. According to calculations by his officials in the Federal Ministry of Finance (BMF), the new benchmark values ​​of the tariff for the years 2023 and 2024 are not only higher than those that apply for 2022, but also significantly higher than those that are in the draft law from September.

According to the BMF proposals, the new basic allowance for 2023 is 10,908 euros after 10,347 euros this year. In 2024, the exempt amount will increase further to 11,604 euros. The top tax rate of 42 percent is to apply for the first time in 2023 from a taxable income of 62,826 euros.

Then in 2024 from 66,778 euros. This year, the first euro will be taxed at 42 percent from an income of 58,597 euros. However, as announced weeks ago, the 45 percent tax rate for the wealthy will not be adjusted. It is still due for every euro from a taxable income of 277,826 euros.

"With the further tariff adjustment, an important signal is given in view of the record inflation," says the ministry. In spring, the federal government still assumed an average increase in the consumer price index of 6.1 percent for 2022 and 2.8 percent for 2023.

The autumn projection published three weeks ago now speaks of higher and longer-lasting inflation. For 2022 as a whole, the federal government is now assuming 8.0 percent. Next year it should still be 7.0 percent.

This amplifies the cold progression effect. This is a secret tax increase. An employee has to pay the same amount of taxes as before, although he has less purchasing power, so his real income is falling.

In the case of wage increases that offset at least some of the inflation, the worker even slides into a higher tax bracket, resulting in more tax deductions than before. Not only does he have less money available in real terms, but also in nominal terms.

This can be illustrated using example calculations from the Federal Ministry of Finance. A single person with a gross salary of 2,400 euros per month or 28,800 euros per year therefore pays taxes of 2,765 euros with the same tariff. According to the new tariff, it would still be 2568 euros for 2023, i.e. 197 euros less, for 2024 taxes of 2360 euros would then have to be paid – a further decrease of 208 euros. So the total effect is 405 euros.

The Ministry attaches importance to the statement that this is not a tax relief. Only the loss of purchasing power is compensated, and a secret tax increase is prevented.

In the case of a dual-income family with two children and an annual gross income of EUR 66,702, the effect is a EUR 872 lower tax burden in the coming year and a further reduction of EUR 456 in 2024. The overall effect would therefore be EUR 1,328 if the BMF plans were implemented climb.

In the case of families, the planned higher child allowances are also taken into account. The allowance is to increase from EUR 5,620 this year to EUR 6,024 next year and EUR 6,384 the year after that. According to the ministry, this corresponds to the planned increase in child benefit.

Whether the allowance or the child benefit paid out is more favorable for parents depends on the amount of taxable income. The tax office checks this as part of the annual assessment.

However, it has not yet been decided that these will actually be the new benchmark values ​​for the income tax rate. Because the values ​​for 2023 and 2024, which have been adjusted upwards again, lead to correspondingly higher shortfalls in government revenue.

In the original draft law from September, the costs were estimated at 12.1 billion euros in the coming year and 17.9 billion euros in 2024. According to BMF calculations, the new tariffs will cost the state 15.8 billion euros in 2023 and 29.3 billion euros in 2024.

The costs of the Inflation Compensation Act do not take into account reduced income due to tariff adjustments that have already taken place this year. In addition, very high incomes are still partially subject to the cold progression due to the unchanged benchmark of the wealth tax rate.

According to the Federal Ministry of Finance, this also explains why the progression report, which will be presented in the Federal Cabinet on November 2nd, even puts the secret tax increase with tariff adjustments at around 20 billion euros per year.

Whether the benchmark values ​​of the BMF will actually be adopted into law will be discussed in the parliamentary negotiations between the SPD, Greens and FDP parliamentary groups in the coming days. "It's about amounts in the billions, because care is required," says Andreas Audretsch, deputy leader of the Greens. You will first take a close look at the progression report.

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