The German Finance Ministry Plans to Reduce Income Tax to Combat Inflation

The German Finance Ministry recently revealed a tax cut plan to reduce the financial burden of inflation. The announced plan, however, has not gone without criticism.

The Changes

Christian Lindner, the German Finance Minister, announced the tax reduction in October. The plan has two parts: raising tax thresholds and increasing child benefits.

While the effect of the plan is to reduce taxes, it isn’t a direct tax cut. Instead, it raises the tax thresholds.

New Tax Threshold

As of the time of the announcement, the tax-free allowance is 10,347 EUR. The Finance Ministry will increase it to 10,632 EUR in 2023 and 10,932 EUR in 2024.

As a tax-free allowance, these figures are the point at which people start paying taxes on their earnings.

Importantly, the top tax rate is also increasing its threshold. It is currently 58,597 EUR. It will be 61,972 EUR in 2023 and 63,515 EUR in 2024.

Child Benefits

The other major change coming from the new plan is the child benefit payments. For the first two children, the monthly payments will increase by 8 to 227 EUR. There will be additional increases for families with more than two kids.

The Goal

The goal behind the tax changes is to reduce the burden caused by inflation. This is especially important given the surge in both energy and food prices.

How It Will Affect Tax Revenue

Of course, the downside of these relief measures is a decrease in tax revenue. The Finance Ministry predicts that the tax revenue in 2023 will drop by 10.12 billion EUR. Further ahead, they predict a drop of 17.5 billion EUR in 2024.

What Critics Say

As mentioned, there are plenty of critics of the changes to the tax thresholds and child benefits.

It Helps the Wealthy

Some critics, including those from the Greens party, argue that the plan benefits the wealthy the most. The party’s spokeswoman, Katharina Beck, explained that the “highest earners benefit three times as much in absolute terms than those with lower incomes.” Beck went on to say, “That is in not in keeping with the times.”

Beck and the Greens party argue that the plan should do the opposite. She said that “strong shoulders should have to bear more.” She also highlighted that inflation has been especially hard on “those who have little money.”

More Targeted Relief Is Ideal

Others say that the relief in the tax plan isn’t targeted enough. Franziska Giffey, the Berlin mayor and a member of the Social Democrats, made this argument. She said that the tax cuts and child benefits won’t help those who need those the most. She especially highlighted that the child benefit won’t help pensioners or students.

It Will Reduce Public Spending

Yet another criticism comes from the expected reduction in tax revenues. Martin Schirdewan, chairman of the Left Party, explained this stance. He says that ordinary people will suffer due to less public spending.

What Supporters Say

Lindner has responded to the criticism of the tax plan. He argued that 48 million people would benefit from these changes. He also pointed out that the changes are specifically for people who had salary increases due to inflation. Those salary increases pushed them into higher tax rates. Lindner says that when combined with increased costs, that tax rate change would limit spending power.

Lindner also highlighted that the plan is “not about a relief, but about removing a burden.”

Conclusion

Inflation has had a global reach, including in Germany. The German Finance Ministry announced increases to the tax threshold and increased child benefits to reduce the burden of inflation. The plan is not without its criticisms but is likely to go ahead.