Doesn’t really have an alternative to cold progression?

The so-called cold progression is a particularly insidious form of tax increase, which usually takes place unnoticed and insidiously. They can be described as a “covert” and continuously acting increase in the tax burden, which builds up over time, without the need for an explicit change in the law. This form of tax increase is so problematicbecause it could potentially violate fundamental principles of the constitution. At its core, it contradicts the principle of the German Basic Law, which states that only those people should pay higher taxes whose economic performance has actually increased. This means that the tax burden should always be measured by real income – not on oneInflation increased nominal wage.

Requirements for a constitutional tax rate

A tax system that wants to meet the requirements of the constitution must therefore either be based on a so-called “dynamic tariff” that is automatically continuously adapted to inflation or is based on a uniform tax rate. A dynamic tariff ensures that the tax levels and allowances are regularly recalibrated, so realIncome increases are taxed, but not the reduction in purchasing power caused by inflation. Alternatively, a uniform tax rate is another practicable solution, where no progression takes place and therefore no cold progression can occur automatically. Surprisingly, this solution is more common than is generally expected.

Countries with a uniform tax rate and how to deal with cold progression

In several countries that work with a uniform tax rate, such as Estonia, Latvia, Lithuania, Romania, Slovakia or Russia, the problem of cold progression is simply not existing. There, the tax rate does not increase with increasing income, which is why a creeping tax increase through inflation adjustments cannot occur. However, even inThese countries, so-called exemption limits or basic allowances, are regularly adjusted to the cost of living so that the tax burden remains fair and not indirectly increased by inflation.

Progressive tax system and inflation adjustment in other countries

In some other countries with a progressive tax rate, such as Canada, the US, Belgium, UK and the Netherlands, inflation is directly taken into account. Here, indexing is an integral part of the income tax formula. This means that the limits of the individual tax classes and the basic allowances are automatically adjusted annually to the inflation rate. thisProcedure prevents taxpayers from slipping unintentionally into higher tax classes just because the prices in the country have increased. This effectively circumvents the effect of cold progression.

Legal and voluntary adjustments in Switzerland, France and other countries

In Switzerland and France, on the other hand, there is no direct integration of inflation into the tax formula, but there are legal obligations that require regular adjustment of the tax parameters to the cost of living. These measures ensure a certain stability and fairness in the tax system. In countries like Ireland, Norway, Denmark and Cyprusno legal obligation to adapt the income tax formula to inflation. Nevertheless, in recent years, these countries have repeatedly made adjustments on a voluntary basis so that the tax burden does not increase unabated by cold progression.

Historical development of cold progression in Germany

A look back at the development in Germany shows how much the situation has changed. In 1958, the progressive tax rate was introduced with a basic allowance. At that time, the marginal tax rate was 53 percent, but was only achieved when income was twenty times the average income at the time. Today, on the other hand, a taxpayer achieves thisBorder tax rate already if income is only about 1.3 times as high as the current average income. If the ratio of back then still applies today, taxpayers would only have to be charged at the top tax rate if an annual income of around one million euros were used. This shift makes it clear how much the cold progression the tax burden on broad sections of the populationhas expanded.

The state and the expansion of its tasks

It can be said that we are dealing with a state whose tasks have grown continuously in recent decades. Policy makers often measure their success less by the efficient use of existing tax resources, but rather by the level of election promises and the expansion of the budget provided for their tasks. the steadyHowever, the expansion of state tasks is not always communicated openly, but often obfuscated by various mechanisms. These include both explicit and implicit government debt, i.e. the shifting of spending into the future, as well as the hidden tax increase due to cold progression.

The challenge of moving the state to a spending discipline

It is unrealistic to expect the state to lower its tax burden of its own free will or to limit its expenses. This behavior can be compared to the image of a severely overweight person who suffers from uncontrolled eating behavior, whose stomach has increased and whose feeling of satiety has been lost. If you put this person in front of a bulging oneFridge and you say “Please pull yourself together”, this will hardly lead to a change in behavior. Nor will a state accustomed to constant expansion be measured by itself.

The necessary coercive measure to limit taxes and expenses

What is required in such a situation is like a compulsory diet – a mandatory measure that restricts excessive consumption and forces healthier behavior. Without such external pressure, the state will hardly voluntarily limit its expenses or reduce the tax burden. Only through clear legal requirements, reforms and political decisions thatAiming to achieve sustainability and efficiency, it can be possible to stop the creeping tax increase through cold progression and to make the financial burden on citizens fair.