How the problem could be solved by dynamizing the progressive income tax rate, but more important would be a change in the tax rate
For weeks now, there have been discussions all over the country about the cold progression. Some want to abolish this side effect of our income tax system. Others also see a need for action, but consider goals such as reducing the national debt and lowering the public investment backlog to be priorities. A compromise line like "Do one thing and don’t do another" is proving to be an attempt to square the circle thanks to the debt brake. But as is so often the case, the real exciting question is whether the ie of "cold progression" The question is whether the film is being shown at all as an economic policy priority, or whether other ies are being (more or less deliberately) pushed into the background.
Cold progression has long been a hot topic among experts, but it attracts a great deal of public attention precisely when the state’s tax revenues are booming. Then claims that the state is helping itself more and more roughly from the burger’s wallet seem particularly plausible. Sentences like "Thus the state eats up our wage plus" are booming, even if they are (deliberately) misleading.
A prerequisite for an objective discussion of the topic is the clarification of what cold progression actually means (see, for example, the informative report in the Suddeutsche Zeitung). The fact that taxpayers, if they draw more income, also have to pay more taxes, has nothing to do with cold progression. Imagine a uniform tax rate on all incomes of, say, 20 percent. Then one who earns â‚¬2000 taxable income per month pays â‚¬400 per month in taxes (0.2 * â‚¬2000). And if he earns 2100 â‚¬ (gross) after a salary increase, then he pays a total of 420 â‚¬ in taxes. Of the additional 100 â‚¬ earned, he has only 80 â‚¬ (net) left over for private use. The average tax rate (420 â‚¬ divided by 2100 â‚¬) remains at 20%. (At this point, social security contributions are not taken into account, this is a simplified example.)
If the 100 â‚¬ that the person in the example earns more merely compensate for the increase in the general price level, the 20 â‚¬ higher tax amount is justified. This is because the state must also be able to cope with a general price increase in its expenditures – be it for higher wages and salaries of public employees and civil servants, or for higher material expenditures due to price factors. If the state always received the same amount of tax revenue in nominal terms, it would become steadily poorer in real terms, i.e. in price-adjusted terms, if the rate of price increases was roughly zero. (This can only be in the interest of those who profit from a weak state, for example in the form that the state cannot keep good experts in the ministries due to lack of money because of salary competition with the private sector "Consulting" The government’s lobbyists will be able to competently assess and, in case of doubt, put the government in its place.)
If the tax rate is not uniform, as in the example above, but is graduated according to income level, more tax will be due on the â‚¬100 of additional income than before. But even this phenomenon is not yet what is meant by "cold progression" but it is only the (intended) consequence of a progressive tax system that provides higher marginal tax rates for higher incomes. A distinction must be made in a factual discussion as to whether we are talking about marginal tax rates or the average tax rate of a taxpayer. An increase in marginal tax rates is only noticeable to a lesser extent in the average tax rate.
For example: The average tax rate on a monthly income of 2000 â‚¬ is 20%. For each additional euro of income up to a limit of 2100 â‚¬, a higher tax rate applies, namely 21 percent. What does the tax burden look like if the taxpayer earns 2100 â‚¬ instead of 2000 â‚¬?? The person continues to pay 400 â‚¬ tax on the first 2000 â‚¬ and has to pay 21 â‚¬ tax on the next 100 â‚¬ (0.21 * 100 â‚¬). Together this makes 421 â‚¬ tax burden. Of the additional 100 â‚¬ earned, the taxpayer is left with 79 â‚¬, i.e.h. One euro less than with the tax rate mentioned in the first example with a uniform tax rate of 20 percent on all income.
While the marginal tax rate has increased by one percentage point, from 20 to 21, the average tax rate has increased only slightly: it is now 20.05 percent (â‚¬421. Aming that for the next 100 euros 22 percent tax would be due, the tax burden would grow to 443 â‚¬ (421 â‚¬ + 0.22 * 100 â‚¬) and the average tax rate would rise to 20.14 percent (443 â‚¬.
Cold progression is when taxpayers slide into higher and higher marginal tax burdens without a corresponding increase in their real income. This is always the case in a progressive tax system with a positive rate of price increase, when the tax rate is based on nominal income values, as in the example above. Weren’t marginal tax rates based on absolute income levels (z.B. 2000 â‚¬, 2100 â‚¬, 2200 â‚¬, etc.), but rather year after year according to a target inflation rate of z.B. 2 percent, then this effect would not occur. In this case, any increase in gross income that does not exceed the target inflation rate would be reflected in a tax rate whose income brackets have grown at precisely this target inflation rate. Thus, the marginal tax rate would remain unchanged in terms of pure inflation compensation as taxable income increased, and the government would not collect disproportionately higher taxes on an ongoing basis simply because of the interaction of progression and inflation.
An example of this reasoning: Again, a taxpayer earns â‚¬2000 per month, which he pays tax on at an average tax rate of 20 percent. This applies in the first year. In year two, when the general price increase is two percent, he earns nominally two percent more. That will be 2040 â‚¬. Because of inflation, this amounts to zero growth in his real income. So that he does not have to pay a higher marginal tax rate on the additional â‚¬40 earned than before, in year two the next highest marginal tax rate applies only from an income level of â‚¬2040. This new income level is calculated on the basis of the old one (2000 â‚¬) multiplied by the inflation rate of two percent. The tax burden in the second year is therefore 408 â‚¬ (= 0.2 * 2040 â‚¬). Compared to the old tax burden of â‚¬ 400, it has increased by the same two percent as the nominal income. However, since the average tax rate has remained the same at 20 percent, there is no cold progression. The state therefore also only receives an adjustment for inflation in the tax revenue.
Alternatively, let us ame that the taxpayer earns nominally more in the second year than is necessary to compensate for inflation.h. 2080 â‚¬. This means that he has achieved a real income increase of two percent (four percent nominal increase minus two percent price increase). Let us also ame that in the second year, a marginal tax rate of 21 percent applies from an income level of â‚¬ 2041. Then the taxpayer in question has moved into an area with a higher marginal tax rate. His tax burden is calculated as follows: 20 percent on the 2040 â‚¬ (that is 408 â‚¬) and 21 percent on the additional 40 â‚¬ (that is 8.40 â‚¬). Together this results in 416,40 â‚¬. On the increased real income, disproportionately more taxes are due, but only on the increase that exceeds the price increase: Instead of another 8 â‚¬, the taxpayer pays 8.40 â‚¬. Again, there is no cold progression.
As a result, with such a dynamization of the progressive income tax scale, taxpayers did not grow ever stronger out of the low marginal tax rate brackets simply because of positive rates of price increases and corresponding income increases. Instead, as is objectively justified, only those whose real (= price-adjusted) ability to pay has increased have experienced higher marginal tax rates on rising income. Conversely, people whose incomes did not keep pace with the target inflation rate slid into income tax brackets with lower marginal tax rates. This would also be objectively justified. For those who earn the same amount in nominal terms, but face higher prices on average when shopping, their tax-relevant ability to pay has decreased. According to the logic of a progressive income tax, the person must then contribute less to the tax revenue than before.
It is possible to think about this and, after careful planning, to work out a dynamization of our progressive tax scale. But it would be much more important to change the tax rate itself, in two respects: The income at which the highest tax rate applies, the so-called top tax rate, should be much higher than at present. A conceivable house number was currently 150,000 â‚¬ annual income for a single person. And at the same time, the top tax rate should be considerably higher, 50 percent or more would be a reasonable rough order here. The increase in marginal tax rates until the â‚¬150,000 threshold is reached could be made more or less equal, depending of course on the input tax rate and tax allowances. There was also nothing to be said against a reasonable interlocking of the income tax system and transfer payments (keyword negative income tax). But more about that another time.
It remains to be said that the discussion about the cold progression obviously threatens to push this much more important point of the organization of the income tax rate into the background. The sentence of Claus Hulverscheidt in the Suddeutsche Zeitung: "A problem that has been the subject of heated discussion these days about cold progression; note.d.Verf. even rudimentarily justified, so not a trace", is to be agreed.
The text by Friederike Spiecker was taken from the website flassberg-economics. Friederike Spiecker and Heiner Flassbeck want to try here with background reports and commentaries to, "to give economics a more rational basis".