Handelsblatt: How inflation absorbs wage increases in Germany

The Bundesbank expects inflation to reach 7% this year. This is bad news not only for consumers, but also for taxpayers, comments Handelsblatt. Because while the state can benefit from high inflation, taxpayers are suffering. And this is due to the so-called “cold evolution”. This means that, while the state benefits from tax increases on a wage increase, inflation and higher taxes offset earnings for the employee.

In previous years, the grand coalition has always offset this inflationary result with corrections to the tax system. But at that time, price increases were low and compensation to the public treasury was correspondingly favorable.

Now, however, inflation is high and compensation is correspondingly expensive, according to new calculations by the German Institute for Economics (IW), which are available to Handelsblatt. The complete reduction of the “cold development” would cost the State 15 billion euros this year. The IW assumes that inflation will be 7.2% for the current year.

This means that the state would face a significant loss of revenue if it had to compensate for the “cold development”. But if politicians do not offset this, taxpayers already suffering from inflation will have to shoulder a high additional burden, according to IW calculations.

Weight gain for the average employee

A single person with an annual income of 25,000 euros will have to pay 213 euros more per year to the tax office, for a single person with an income of 40,000 euros it will be 301 euros, for a single person with an annual income of 60,000 euros 486 euros. From an income of 80,000 euros, the burden of cold development amounts to 672 euros.

Federal Finance Minister Christian Lindner (FDP) considers the “hidden tax increases” associated with inflation unfair and is determined to offset them – although he could well use the extra revenue to keep the debt in check again. the following year.

In the fall, the federal finance minister wants to submit a proposal to reduce “cold progress” following the presentation of the new progress report, in which the federal government assesses the future evolution of inflation.

IW economist Martin Beznoska says the state can face a “cold development” offset without higher income tax increases. cold evolution “. Thus, according to the May tax estimate, the federal government can expect additional revenues of about 17 billion euros this year.

SPD and Greens against the reduction of cold development

However, unlike the FDP, the SPD and the Greens do not believe much in the complete abolition of “cold progress”. Instead of cutting taxes, both parties prefer to use the money for direct transfers as part of a third relief package.

In addition, higher incomes will benefit more from lowering cold progress than lower incomes because they pay more taxes. “This would be socially unfair and also costly for the budget,” said Sven-Christian Kindler, a Green Party politician.

Instead of fully offsetting the cold development, the SPD and the Greens are in favor of a partial reduction, if any, or require lower-income relief to be offset by higher taxes on higher-income earners. “That would be neutral and fair,” says Kindler.

Linder, however, resists with all his might. He asked government officials at the Federal Treasury to calculate how much the maximum tax rate would have to be raised to finance lower- and middle-income relief in a neutral way, such as by flattening its mid-swing.

The result: from a taxable annual income of 80,000 euros, the maximum tax rate should increase from the current 42% to 57.4%. That would be more than at Helmut Kohl, when the rate was 53%.

Almost 10,000 euros more tax per year

The IW calculated what such a large increase in the maximum income tax rate would mean. A person who earns 100,000 euros per year will have to pay 1634 euros more in taxes per year. Whoever earns 150,000 euros per year will have to pay 9,334 euros more in the public coffers.

IW researcher Beznoska warns that these high tax rates “act as a deterrent to attracting skilled international workers and place a particularly heavy burden on individual businesses and private companies in terms of investment financing”.

Private companies, for example, pay income tax like any regular employee. They should also carry the extra weight. “Such a tax increase reduces the attractiveness of the place of business and reduces the urgently needed growth potential after the years of crisis,” Beznoska said.

Even if the maximum tax rate does not eventually rise to 57%, the calculations show one thing: a simple increase in the maximum tax rate can hardly offset the easing of lower and middle incomes.