Secret tax increase – the cold progression as an income brake

Everyone has heard of it. It’s bad and costs us money. Few fully understand. Now it is being abolished and bringing us financial benefits: we are talking about cold progression.

But how does it work? First of all, you should know that we have a “progressive” tax system. 11,000 euros per year is tax-free. The more you earn, the more income tax you pay. The rates will increase in phases: first you pay 20 percent up to 18,000 euros (taxable income), in the next phase 32.5 percent and in the highest phase 55 percent.

If you get a raise, it is placed “on top of it”, that is, taxed at the highest level for the employee. This naturally increases the average tax burden. Here is an example (graph above): Anna earns 30,000 euros gross this year. Suppose she gets a pay rise over the next three years that exactly matches inflation. At the end (2025) she will receive 34,905 euros gross, 16.4 percent more. But instead of 2,212 euros, she pays 3,280 euros in income tax, no less than 48 percent more. This effect is called “cold progression”.

“This is a secret tax increase that the state has no right to,” said Franz Schellhorn of Agenda Austria, which has been campaigning for years to end cold progression. The effect described above can be prevented by adjusting the wage tax amount annually.

So, for example, the limit to which only 20 percent is deducted – currently 18,000 euros – is increased with inflation (this year approximately 7.8 percent), so that you only end up in the next tax bracket above 19,260 euros in 2023. “That’s how it works in Switzerland, that’s the best model,” says Schellhorn. In Austria, this is now resolved a bit differently.

You take the inflation between July 2021 and June 2022. Two-thirds of this will be added to the tax brackets for 2023, so that you pay less payroll tax next year and, according to the Minister of Finance, “receive an average of 300 to 500 euros. more net”. The remaining third will be used by the government for social policy measures, details are still open.

Schellhorn: “That’s better than the old solution, when you celebrated a tax reform every few years, even if only the cold progression was paid back.” Because without measures, the extra income for the tax authorities will automatically grow. In 2023, due to the inflation that was so high this year, it would have an effect of three billion euros, in 2025 it would be a total of 13 billion euros without the abolition.