The state does not wish to make money out of inflation at the expense of its citizens. In order to dampen creeping tax increases that are linked to cold progression, the Federal Cabinet has proposed a law to provide for inflation compensation. Around 48 million people in Germany are going to benefit from this. In addition, child benefits will be increased.
The so-called inflation compensation act provides that taxation will be adjusted to inflation for around 48 million citizens, to avoid an additional burden. Furthermore, families will receive targeted tax support, for example by raising the basic personal tax allowance and the child tax allowance and by increasing child benefits. These decisions are part of the third relief package.
Cold progression: The term “cold progression” refers to a type of gradual tax increase whereby a pay rise is completely absorbed by inflation but still gives rise to higher taxation. The result: people have less money at the end of the day, despite getting paid more.
Planned relief measures
The so-called inflation compensation act provides for two relief stages – starting in 2023 and 2024. The goal is to counterbalance an additional burden and support families in a targeted manner. The total tax relief volume will be over 12 billion euros in 2023, going up to around 18 billion euros in 2024.
The law will:
- reflect the minimum subsistence level for children and adults in tax law. This is ensured by raising the basic personal tax allowance and the child tax allowance correspondingly.
- compensate for so-called cold progression through the income tax rate. This is the estimated inflation for 2022 and 2023 that is compensated for in the 2023 and 2024 tax rates. There will be no changes in the area of the so-called rich people’s tax (tax rate of 45 percent).
- raise the child benefit for first, second and third children to a uniform amount of EUR 237 per month from 1 January 2023.
The reports about minimum subsistence levels and tax progression will not be available until October. The Coalition Committee decided that the resulting adjustments will be handled by means of the parliamentary procedure.