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German tax plan aims to ease inflation burden

August 10, 2022

The German Finance Ministry has revealed a plan to ease income tax in response to spiraling inflation. However, critics had claimed the measures would benefit top earners the most, and squeeze public spending.

A customer pay for vegetable
The price of food, as well as energy, has increased with inflation hitting its highest in decadesImage: Moritz Frankenberg/dpa/picture alliance

German Finance Minister Christian Lindner on Wednesday announced measures to raise tax thresholds and increase child benefit slightly.

The plans are intended to help ease the burden of rising inflation for households, amid rising food and energy prices.

What does the plan entail?

Rather than directly cutting taxes, the proposals would raise the threshold from which tax is paid, including the level from which the highest rate is levied.

The Finance Ministry is set to raise the tax-free allowance from €10,347 (roughly $10,550) currently to €10,632 next year and €10,932 in 2024. People start paying income tax on earnings after this figure.

The top tax rate, which currently kicks in from €58,597 at present will increase to €61,972 next year and from €63,515 in 2023.

Meanwhile, child benefit payments for the first two children are set to rise by €8 to €227 per month, along with other increases for families with more than two children.

 As a result, the Finance Ministry expects tax revenue to drop by €10.12 billion next year, and by €17.5 billion in 2024.

What is inflation?

Criticism inside and outside coalition

There was criticism for the plans from within the three-way coalition, of which Lindner's Free Democrats are the most pro-business and neoliberal member ideologically.

Politicians from fellow junior coalition partner the Greens have attacked the plans as regressive, saying they provide the greatest advantage to the already wealthy. 

"Billions in tax relief from which high earners benefit three times as much in absolute terms than those with lower incomes — that is not in keeping with the times," Katharina Beck, the Green Party spokeswoman on financial affairs, told the RND news group.  

"The opposite would be the right thing. Strong shoulders should have to bear more than those on a low income and should not be disproportionately relieved. These really hard times especially affect those who have little money." 

There was also criticism from Berlin Mayor Franziska Giffey, of Olaf Scholz's Social Democrats — the leading coalition partner — who said more targeted relief was needed. She told Welt news channel that tax cuts and across-the-board child benefit increases would not help those most in need. 

"Another child benefit increase is nice for those who get it. But again, it doesn't help pensioners, and it doesn't help students either." 

Weak euro – Good news for who?

Lindner defends measures

Speaking in response to the criticism, Lindner said that, in all, some 48 million would benefit from the tax changes.

He said the changes were aimed at relieving the pressure on people whose income was pushed into taxation at higher rates as salaries rise because of inflation. This, combined with higher living costs, would effectively push down their spending power — a phenomenon known as "cold progression."  

The measures would provide relief to those taxpayers with an annual income below €62,000, Lindner said.

"This is not about a relief, but about removing a burden," Lindner said. The minister said he was also in favor of "strong shoulders bearing more than narrow shoulders."

However, he said, cold progression would also "burden people whose shoulders have not become broader at all."

Left Party urges spending, not cuts

The chairman of the socialist Left Party, Martin Schirdewan, said the plan would squeeze public spending at the expense of ordinary people.

"Because Lindner refuses to give the rich and crisis profiteers a greater part in financing the costs of the crisis — and at the same time sticks to the debt brake, or better put, the investment brake — predictably money will be lacking for necessary social spending and investments," Schirdewan told the AFP news agency.

"Those who unilaterally cut taxes also dry up the state budget and create a pressure to save money, usually at the expense of the general public and urgent public tasks."

While you're here: Every Tuesday, DW editors round up what is happening in German politics and society. You can sign up here for the weekly email newsletter Berlin Briefing.

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