Federal Finance Minister Christian Lindner (FDP) wants to introduce a comprehensive tax package in the coming negotiations in the traffic light coalition for further relief for citizens. As was announced on Monday, the improvements in the basic tax allowance, child benefit and inflation compensation for income tax should have a total volume of around ten billion euros in the coming year. In 2024, another step of four billion euros would be added.
The coalition is legally obliged to adjust the income tax allowances for adults and children (and thus also the child benefit) to the price increase. In part, this has already happened with the implemented relief steps – as part of the second relief package, the allowances have already been increased retroactively to January 1, 2022. According to the number tableau that has now become known, the basic allowance is to increase in three steps to 10,933 euros by 2024. Before the retrospective increase, it was 9984 euros.
According to a report by “Spiegel”, Lindner expects an inflation rate of six percent this year and 2.5 percent next year. The income tax rate could also be adjusted to the same extent, but the Federal Government and Bundestag have some discretion here. In addition, the inflation rate could be corrected upwards in the coming weeks. Lindner wants to make full use of what is possible. Accordingly, the amount from which an income is taxed at the top tax rate of 42 percent increases from the current EUR 58,597 to EUR 63,521 in 2024 – an increase of 8.5 percent.
Lindner tweeted that with his proposals there was “a noticeable and lasting inflation adjustment. I regret the sometimes class-struggle tone in the debate. After all, small and medium incomes will benefit the most from a change in tariffs.”
The Minister of Finance was thus targeting criticism from the SPD and the Greens of the plans to extensively adjust the tax rate. The fact that Lindner wants to leave the tax rate of 45 percent for super earners at 277,826 euros does not change the resistance in the coalition, so no inflation compensation is taken into account here. The SPD financial politician Michael Schrodi complains that higher incomes benefited particularly strongly from Lindner’s plans. “Even sticking to the current rate of wealth tax would hardly mitigate this effect,” he told the Tagesspiegel.
The economist Stefan Bach from the German Institute for Economic Research (DIW) calculated the effect. If the income limit of the tax on the wealthy were not raised, those affected would be relieved of EUR 590 per year instead of EUR 1,120 if the tax rate on the wealthy were to take effect from a higher amount. According to Bach, with around 170,000 people in the wealthy tax system, this means lower tax revenues of 90 million euros a year. The proportion of the total volume of the planned tax adjustment would therefore be very small.
“In the current crisis situation, it is important that we provide targeted relief for people with small and medium-sized incomes. They are the ones who suffer particularly from the high energy and food prices,” said Schrodi. He therefore proposes targeted direct payments, as the coalition has already initiated with the family subsidy or the energy price flat rate. “It is necessary for us to hold a debate about further relief measures. Our guideline for this debate must be to use public funds as efficiently, purposefully and fairly as possible,” emphasized the SPD politician. Also a relatively larger increase in the basic tax-free allowance would be a way to relieve lower groups a little more.
At the weekend, Family Minister Lisa Paus (Greens) made a corresponding statement and brought up higher child benefits. According to Lindner’s preliminary figures, that should increase by eight euros to 227 euros for the first two children in 2023.
According to Bach’s calculations, with a uniform inflation adjustment of the tax rate, almost ten percent of the relief amount goes to the bottom 50 percent of the adult population, while the top 20 percent accounts for a good 50 percent. According to a study by the Bremen Chamber of Labor, an inflation adjustment of six percent would relieve a single person with a gross income of 40,000 euros by 252 euros a year, while a single person who earns 80,000 euros would save 627 euros. A household with two adults and two children with an annual income of 40,000 euros would save 316 euros, while an income of 100,000 euros would save 518 euros.
Lindner, on the other hand, emphasizes the broad effect of the inflation adjustment. “We shouldn’t make the mistake of denying many millions of people significant and lasting inflationary compensation because a few people are begrudged of it”; he told the “Handelsblatt”. “The opponents are taking the middle of society hostage because they want to burden the IT specialist, the heart surgeon and the company.” He has already taken his plans into account in the draft budget for 2023.
The SPD and the Greens blame Lindner for the fact that he recently reacted with a clear rejection of their proposals. Regarding the demand for an extension of the nine-euro ticket, the FDP boss said that a “free mentality” was “not sustainable, not efficient and not fair”.
