Fiscal drag#Bracket creep

Cold progression is the additional tax burden that occurs when the parameters of the income tax rates are not adjusted to the price increase. In a broader sense these terms is also the additional tax burden that occurs when the tariff benchmarks are not adjusted to the average income growth.

• 2.1 General
• 2.2 Development in Germany
• 2.3 Situation in Austria
• 2.4 Situation in Switzerland

Definition

Cold progression in the strict sense

The cold progression in the narrower sense - also known as inflation-induced bracket creep - is the additional tax burden that occurs when not at the price developments (inflation) be adapted for a progressive income tax rate tariff benchmarks. Income increases in the rate of inflation in this case lead to an increase in individual income tax burden or the personal average tax rate, even though the individual real incomes and thus the economic capacity of the taxpayer is not increased. At a constant income, the income tax burden would remain the same, although the individual's real income decreases.

Example: The price level of inflation climb in one year by 2 percent. A taxpayer achieved in the same year a gross income increase of 2 percent also. In order for a post adjustment would be achieved if not his tax burden rises in percentage and absolute because of its higher nominal income due to the progressive scale. After deduction of the tax burden it has a lower purchasing power despite a nominal increase in net income in the previous year.

It should be borne in mind that after a standardized basket determined inflation rate for all income groups is the same as at lower income, the proportion of essential supplies on consumption in relation to luxury goods is greater than at higher incomes. In the graph on an inflation rate of 2 % for all is assumed for simplification.

Cold progression in a broader sense

From the cold progression in the narrower sense, the fiscal drag is in the technical literature in a broad sense - also called secret tax increase - a distinction. The cold progression in a broader sense, the additional tax burden that occurs when, for a progressive income tax rate tariff benchmarks are not adjusted to the average income growth. Income increases in the amount of the average income growth in this case lead to a disproportionate increase in the individual income tax burden. Technically speaking, increases the personal average tax rate. Overall, this tax revenue is growing faster than the tax base.

Disposal option

Generally

The hidden tax increase through bracket creep can be avoided by periodic adjustment of the income tax rate to the development of purchasing power. To avoid a permanent discussion about adaptation, suggest some votes before an automatic adjustment mechanism. So, for example, suggested the Institute for Applied Economic Research, a coupling to the price increase or the rate of growth of national income before. The risk of inflation promotion is seen by the German Federal Ministry of Finance, however.

The problem could also be due to the abolition of tax progression solve, for example, by the introduction of a single tax rate or a flat tax, in each case without basic allowance. These proposals are, however, criticized as socially unjust, as a tax on the power of insufficient and not successes by the unit control the flat tax. The government of British Prime Minister Margaret Thatcher led the late 1980s in Britain the poll tax community charge ( better known as the poll tax ) a. However, 18 million Britons refused to pay the tax, and there were violent protests. Ultimately, the community charge was decisive for the crisis and the resignation of the Thatcher government. It was replaced in 1993 by the municipal tax ( council tax ).

Development in Germany

The income in Germany had doubled from 1975 to 1989, while the benchmark figure of 130 020 DM ( € 66,480 ), in which the top rate began to take effect by 56%, remained the same. This meant that more and more taxpayer into a higher tax rate " grew into it ." From 1990, this situation was mitigated by changing the rate curve. The introduction of a linear progressive tariff eliminated the so-called " middle class belly".

Income tax rate reform in Germany in 1990 (elimination of the " middle class belly " )

Rate curves of marginal tax rates from 1990 to 2013 with taxable income of up to 280,000 euros / year.

Rate curves of the average tax rates from 1990 to 2013 with taxable income of up to 280,000 euros / year.

Rate curves for the years 1990 to 2014 taxable income of up to 30,000 euros / year.

From 1999 to 2005, income tax rates were reduced significantly under the Schröder / Fischer government (see above diagram). Under the government of Merkel / Steinmeier these tax rates were maintained until 2008 for taxable annual income less than 250,000 euros. For 2009 and 2010 the tax rate was reduced to 14%, slightly increased the basic allowance to 8004 Euros and the top benchmarks on 52 881 EUR and 250 730 EUR (tariff 2010). Automatic adjustment of the inflation rate, there are not still.

The FDP called before the federal election of 2009, the introduction of a tariff levels, for example in Austria. But a sliding scale focuses the problem only on the transitions from one stage to the next. Between the stages, although there occurs no cold progression, but it is the transition to the next level, the greater so that the bracket creep effect unchanged on average. A sliding scale would thus not solve the problem of bracket creep.

Situation in Austria

In Austria there are in the income tax law specifies a sliding scale (stepped - progressive tariff), but which can also trigger on the transition points between stages a cold progression. The problem to be solved here by the shift of the basic parameters of the stages.

Situation in Switzerland

In Switzerland there are legal obligations of the legislature to a periodic compensation of cold progression (Art. 128 para 3 BVVorlage: Art / Maintenance / ch Search, Article 39 DBGVorlage. Kind / Maintenance / ch- search. ). Once the cumulative inflation 7 percent above the last level, the tax rate must be adjusted. Since 2010, the fiscal drag is compensated annually for the federal tax, what did some cantons already formerly for the much higher government control and the coupled council tax. Similar schemes to compensate the cold progression, there is for example in France and in Canada.