Policy Note 31: Abolish cold progression completely

Cold progression leads to an increase in the tax rate and an additional burden on private households. "Cold progression considerably restricts the consumption options of private households. Without reform, the burden will continue to increase from year to year," says Tobias Thomas, Director of the economic research institute EcoAustria. Without an adjustment to the income tax rate, the average tax rate would rise from 15.7 percent today to around 20 percent within 10 years. This would result in a cumulative additional burden on private households of 66.3 billion euros. If the rate adjustment takes place when an inflation threshold of 5% is exceeded, the average tax rate will increase more moderately. However, the cumulative additional burden on private households over ten years still rises sharply to 23.8 billion euros. Even if the tax rate is adjusted annually on the basis of consumer prices, the additional burden on private households increases due to productivity-related wage increases. This increase amounts to almost 15 billion euros cumulatively over ten years.

"If the additional burden on private households due to cold progression is to be abolished, the income tax rate, exemptions and deductions should be automatically adjusted annually to the average wage development," explains Thomas. Many countries, such as Belgium, the Netherlands, Canada, Switzerland and the United States, already have regulations for adjusting tax rates. In Denmark, Norway and Sweden, this is done on the basis of average wage development. "Indexing the tax rate is also a signal in international competition, in which locations not only compete to attract companies, but also to attract skilled workers in particular," says Thomas.

On the other hand, the additional burden on private households as a result of cold progression represents additional revenue for the state, which can be used for financial leeway or budget consolidation. However, analyses by EcoAustria have shown that there are billions in efficiency potential in public spending that could be leveraged without the state's performance having to deteriorate. "If there is a need for further financing and consolidation over and above the efficiency potential, this should be legitimized transparently via the democratic parliamentary decision-making process and not "through the back door" via cold progression," concludes an EcoAustria policy note published today.