The Germans pay 20 billion euros too much income tax

In the coming days, politics will – even more than usual – be about money, about a lot of money. The focus is on the question of how many taxes the state needs in these times and how much new debt it can afford.

On Thursday afternoon, Federal Finance Minister Christian Lindner (FDP) will present the current forecast of the working group on tax estimates. It is to be expected that the panel of experts, which includes tax experts from the leading economic research institutes and the Bundesbank, will once again raise its forecast from the spring, despite the expected recession. The federal, state and local governments can therefore count on higher revenues.

The main driver of the increasing tax revenue is, on the one hand, the stable, low level of unemployment. Despite the crisis, the level of employment is high, which gives the state consistently high income from wage and income tax.

Second, there is high inflation. The higher the prices rise, the more taxes the state collects. In the past few months, sales tax has poured significantly more money into the state coffers than expected.

In addition, the state benefits from a secret tax increase: the so-called cold progression. Shortly before the results of the current tax estimate are known and the distribution battle for the additional billions begins, Lindner gave the 5th tax progression report to the vote within the federal government, next week it is to be discussed in the cabinet.

According to the draft report available to WELT, taxpayers will pay 20.4 billion euros too much income tax this year, and even 21 billion euros next year. In other words: “In 2022, around 35.5 million taxpayers with an average of around 659 euros will be affected by the cold progression on an individual level”, as stated in the report. This is more than previously expected.

Taking into account minor adjustments to the tax rate, such as the increase in the basic allowance that has already taken place, an average additional burden of 575 euros per taxpayer remains for 2022. In the coming year, the average progression effect, including the relief effects that have been decided, is 592 euros.

Cold progression means a secret tax increase through inflation: an employee has to pay the same amount of tax as before, even though he has less purchasing power and his real income is falling. In the case of wage increases that offset at least part of the inflation, he even slips into a higher tax rate.

If Lindner has his way, the cold progression will be completely compensated for in the coming year. He can refer to his predecessors. Since 2013, politicians have regularly adjusted the inflation effect with a one-year lag.

That always worked well, as the Bundesbank stated in a report in June. "The cold progression was not always exactly compensated for every year, but overall it was roughly balanced," it said.

It is now up to the traffic light coalition to update the Inflation Compensation Act. In order to reduce the cold progression, the basic allowance is usually increased and the other key values ​​of the income tax rate are shifted.

Lindner has already announced that the exempt amount, up to which no taxes have to be paid, is to increase to EUR 10,908 in 2023 - so far only an increase from EUR 10,347 to EUR 10,632 is planned. The progression report does not reveal where the other key figures might be.

At the Institute of German Economics (IW) in Cologne, however, one has already calculated. According to this, the so-called top tax rate, i.e. the 42 percent, would have to take effect for the first time with a taxable income of 63,284 euros in order to fully compensate for the cold progression in the coming year. So far it is 58,597 euros, in the new Inflation Compensation Act there is still a value of 61,972 euros.

The bottom line is that an employee would only have to pay tax on the first euro at 42 percent if the cold progression were fully compensated for if the income was almost 4700 euros higher.

Full compensation for cold progression is controversial within the federal government. The SPD and the Greens point out that this relieves high incomes more than low ones – that is not necessary. The money could be better used for further direct relief for small and medium-sized incomes in the fight against the increased cost of living.

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