Economic impact of the abolition of cold progression

In an analysis commissioned by the Federal Ministry of Finance, the economic research institute EcoAustria examined the macroeconomic effects of the complete abolition of tax progression.

The government has announced that it will completely abolish cold progression from 2023. A corresponding law is to stipulate that marginal amounts of the progression levels - with the exception of the 55% level - as well as deductible amounts subject to negative tax (transport deduction, supplement to the transport deduction, pensioner deduction, maintenance deduction, single-parent and single-earner deduction) will be automatically increased by 2/3 of inflation from July to June from January 1 of the following year. In order to be able to react to changing macroeconomic conditions, the Federal Government should be legally obliged to submit a legislative proposal to the National Council each year to the extent of the remaining 1/3 of the effect of cold progression, which includes relief measures for employed persons and/or pensioners to the extent of this volume.

According to the analysis by EcoAustria, earned income will be noticeably boosted by the abolition of cold progression. On average, real net wages will be 0.8% higher in 2023 and just under 1.8% higher in 2025. This would also strengthen the supply and demand for labor and have a correspondingly positive effect on employment. According to EcoAustria's model simulations, the abolition of cold progression will increase employment by 0.5% in 2026, which corresponds to around 23,000 additional employees. A good half of this effect is attributable to lower unemployment. It has been shown that the labor market situation of low-skilled workers will improve more strongly.

Tax relief in particular, but also the positive effect on employment, will increase the disposable income of private households. Private consumption will therefore be stronger. The consumption effect will amount to just under 0.8% in 2023 and rise to 1.6% in 2026. Due to the higher demand and the increase in employment, companies' investment incentives will rise and real investments will increase by around 0.4%.

The abolition of cold progression increases real GDP by 0.3 percent in 2023 and by just under 0.7 percent in 2026, which corresponds to a value added effect of EUR 1.4 billion and EUR 3 billion respectively. It should be noted that the lower tax burden in turn has repercussions on public finances via these positive economic effects. The positive consumption effect leads to higher revenues from consumption taxes and the employment effect means that social security contributions and payroll taxes increase and income tax falls less sharply. This means that the measure is around 40 percent self-financing.