17.3 The effect of cold progression with tariff adjustment

In the graph below, you can compare the tax rates of one year (blue) with the tax rates of a previous year (red), which were adjusted with the inflation rate. Both the marginal tax rates (thin) and the average tax burden (thick) are displayed. This comparison shows you by how much the tax burden has changed in real income. The income regulator gives you the possibility to display the comparison in Euro and in percent.

You can choose rates between 1958 and 2016. The initial year must be before the end year.

The default setting shows you the maximum period. It becomes obvious that the tax policy of the last decades has put an increased burden on the middle class and has greatly relieved both the lower income classes and the very high incomes.

Below 42,000 Euro the burden is lower, because the tax-free allowance has been increased significantly from 860 Euro in 1958 to 8652 Euro in 2016. This advantage is greatest for an income of about 10,000 and is used up by the higher tax rates at an income of about 42,000 . The adjustment of the basic tax-free allowance was greatest at the change of tariffs in 1996 from 2781 to 6184 .1 To make this effect as clear as possible, the years 1995 and 1996 should be selected. At the same time however the tax rates were increased, so that the tax burden was again the same above an income of 28,000.

Above an income of about 175,000 Euro, the tax burden for the current tariff is lower than that of the same real income in 1958. This is due to the lower maximum tax rate. In 2016, the maximum tax rate is 42% above 53,666 Euro and 45% above 254,447 Euro. Plus the solidarity contribution, which in 2016 is 5.5% of the tax amount, resulting in a maximum tax rate of 47.5%. This is approximately 5.5% lower than the 53% maximum tax rate that was in force until 1999 (even 56% from 1975 till 1988).

On the following pages, we will determine which additional tax revenues have been levied on the individual groups as a result, or to what extent they have been relieved and what the net effect is for the state.

Ausgangsjahr Endjahr

1This adjustment was made due to the decision of the Federal Constitutional Court on 25.09.1992, which had declared the previously valid level of the tax-free subsistence minimum to be unconstitutional.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743
E-mail: Bauer@uni-trier.de
URL: https://www.cbauer.de