Whether in the news or in the daily newspaper: The term cold progression keeps popping up. But what exactly do you mean by that? We explain what is meant by the term cold progression and what effects the additional tax burden can have.
What is the cold progression?
The so-called cold progression is always used when the income tax rates are not adjusted to inflation. So the wage increases only offset rising inflation. For employees, this means that they can no longer earn the money despite a wage increase. Because the prices for goods and services rise to the same extent. In a broader sense, this also includes the additional tax burden .
Normal progression vs. cold progression
In addition to the cold progression, there is also the normal progression . Normal progression is used when comparing lower tax rates on low income and higher income.
Cold progression, on the other hand, occurs when, in the event of inflation, only the level of income and not the income tax rates are adjusted. It can then happen that people have less money available when they should actually get more.
Cold progression in the strict sense
The cold progression in the narrower sense only occurs when the income tax is adjusted to the normal income. However, it is then not adjusted to real income.
So there is an increase in the tax burden if the corresponding inflation rate is not taken into account.
Cold progression in the broader sense
The cold progression in the broader sense occurs when the income tax is not adjusted to the average development of the nominal income in the population. If a cold progression arises in the broader sense, the entire society moves into a higher income tax bracket . This higher class then ensures that the state’s tax revenue increases.
Cold progression: income tax
Basically, all people who are gainfully employed in Germany must first pay income tax. This income tax is levied according to the constitutional principle of performance. Basically, this means that those who earn more than others also have to pay more taxes. Because people who earn more are also more productive at the same time.
Progressive taxation in the current income tax rate
The income tax rate always begins with a zero zone or the so-called basic tax allowance . With this basic allowance, the first € 9,408 of your income remains tax-free.
From an income of € 9,408 , the marginal tax rate will rise steadily. It starts at 14% and can go up to 42% .
Explained using an example, it would mean that the 9,408th euro is charged with 14% tax.
Although this income is taxed at 14% , this number would result in a tax rate of almost 0 .
Effects of Cold Progression on Tax Revenue
The effects of the cold progression are quite beneficial for the state, which makes relatively good profits from the progression. In the years from 2006 to 2012 , the profit from the cold progression amounted to approximately 63 billion euros .
The progression has a greater impact on small to medium – sized businesses than on top earners, because the tax rate remains constant beyond the € 57,052 limit, while it continues to rise below this amount.
Criticism of the cold progression
So the cold progression can lead to severe disadvantages and bring with it some problems. Alongside these problems, there is criticism of the progression, which states that it will become an increase in the tax rate that is beyond democratic control.
Basically, it is correct that the inflation-related tax hike goes virtually unnoticed. But this always happens in the absence of political activity. In fact, however, the federal government must inform the Bundestag every two years in a public session or in writing about the cold progression. It becomes clear that the allegation of the secret tax increase is untenable, because in the years from 2013 to 2018 the government repeatedly made corrections to this tariff.
In addition to the criticism that the tax is levied secretly, there are also the points that state that normal earners within the population are only asked to pay. The people who get raised pay more and more taxes. In addition, the other taxes that have to be paid by taxpayers are also increasing.
So in the end, these people don’t really have much more money in their pockets than they did before. In contrast, the tax rate for top earners always remains the same. The bottom line is that normal earners have to spend more money in the end than high and top earners.
It is relatively easy to understand how cold progression can arise and what problems it brings with it. Due to inflation, taxes continue to rise. This also leads to a clouded joy about salary increases. Because at the same time as the salary, the taxes also rise.
It can also be seen that the state in particular earns very well from the progression, if you look at the 63 billion euros that were earned in a few years.
Politicians must therefore ensure that income tax rates are adjusted to the corresponding inflation rate . The criticism of a secret tax increase is also incomprehensible, since a declaration about this cold progression must always be made – every two years . So it is advisable to question this argument.
The cold progression is not a nice thing, but different economic contexts lead to it being created. It has often been a topic in political discussions. The frequent demand that is made there is usually that it should be abolished. How this should really be implemented, however, nobody knows exactly. It remains to be seen whether this plan can be implemented in the near future.