German tax-free allowance 'set to rise' amid record-high inflation

The Local/AFP
The Local/AFP - [email protected] • 25 Oct, 2022 Updated Tue 25 Oct 2022 22:51 CEST
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German Finance Minister Christian Lindner at a Minister President conference in Hanover on October 1st. Photo: Schloss Herrenhausen

The German Ministry of Finance has proposed providing greater relief to taxpayers than originally planned.

The basic Grundfreibetrag, or the income up to which no tax has to be paid, should rise by €561, bringing the total amount to €10,908, according to a proposal set forth by German Finance Minister Christian Lindner (FDP). 

The Kinderfreibetrag, or tax-free child allowance, should also be increased by €404 to €6,024 if the new plan is agreed upon by the cabinet.

The amount is slightly higher than the €10,632 that the cabinet had agreed to in September. The new amount, however, would not come into effect until 2024, or for the tax year 2023.

Germany’s approximately 48 million taxpayers have an upcoming deadline of October 31st for 2021 taxes, or August 31st, 2023 for those who use a tax adviser. 

READ ALSO: Who benefits most under Germany's tax relief plan?

Higher relief all around

The proposed increases come in light of both high inflation and changes to Germany's social welfare system, which saw unemployment benefits rise over the past year.

"People receiving social benefits and working taxpayers deserve equal fairness,” Lindner told Bild. 

German inflation hit a record of 10 percent in September, fuelled by higher energy prices after Russia halted gas flows through the crucial Nord Stream 1 pipeline amid tensions over Russia’s war in Ukraine.

The German government now expects Europe's biggest economy to shrink by 0.4 percent in 2023.

"Companies and households are increasingly suffering under higher energy invoices and ongoing high inflation, adjusting consumption and investments," said ING economist Carsten Brzeski.

"There is very little evidence that the German economy can avoid recession," he added.

Higher inflation rates reduce the purchasing power of consumers because they can afford less per euro. 

They in turn lead to so-called cold progression. This is a kind of creeping tax increase: people continue to pay high taxes even though their purchasing power is falling due to inflation.

Vocabulary

Relief - (die) Entlastung

Tax adviser - (der) Steuerberater

reduce/impair - schmälern

Purchasing power - (die) Kaufkraft

Inflation rate - (die) Teuerungsrate

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The Local/AFP 2022/10/25 22:51

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