By Christian Kraemer
FRANKFURT (Reuters) -The German finance ministry said on Wednesday it is preparing personal income tax cuts to rectify a creeping fiscal burden from inflation, in a package that a government source said could be worth more than 13 billion euros ($14.2 billion) per year from 2026.
Germany has a system of income tax rates that rise with income, and the cuts are designed to offset fiscal drag, also known as “cold progression,” whereby inflation leads to a higher average percentage of taxes over income.
Unlike in several other major economies such as the United States, Canada and Switzerland, thresholds in Germany’s progressive tax system are not automatically inflation adjusted.
Under the plan by Finance Minister Christian Lindner, the tax-free allowance would rise in three steps until 2026 and the level of income that triggers the highest tax rate would also be lifted, according to the government source.
The newspaper Bild first reported on the relief amount.
The ministry said in a statement that tackling “bracket creep”, the fiscal drag on earners above the minimum subsistence level, was constitutionally required, while easing the burden on higher incomes was a question of fairness.
It said final figures would not be available until the autumn.
“The minister wants to protect citizens from secret tax increases due to inflation,” the ministry said in a statement.
Germany passed a law in 2022 to compensate for inflation through tax adjustments for 2023 and 2024, and the finance ministry said it is assuming government agreement on that basis for 2025 and 2026.
The move could further limit the government’s budget flexibility as Lindner, leader of the pro-business Free Democratic Party, is also a fiscal hawk who routinely resists higher spending plans proposed by his coalition partners, the Social Democrats and the Greens.
The International Monetary Fund said last month that Germany needs to boost public investment and should consider easing its debt brake, which limits public deficits to 0.35% of gross domestic product.
($1 = 0.9197 euros)
(Reporting by Ludwig Burger and Christian Kraemer; Writing by Miranda Murray; Editing by Shri Navaratnam and Hugh Lawson)
