With the abolition of cold progression as part of the aid package announced by the government, a paradoxical phenomenon is addressed at first sight: despite a salary increase, people may be able to afford less than before. With the end, average earners could now receive about 24 euros more per month in net wages.
As in many other countries, the wage and income tax rate in Austria is “progressive”. Income is split into parts (at least for higher salaries) and taxed with increasing tax rates according to so-called rate levels. Up to an annual salary of 11,000 euros, no tax will be levied around 2022. With a salary between 11,001 and 18,000 euros, the first 11,000 euros are tax-free again, the rest is subject to a tax rate of 20 percent. The same applies to a salary between €18,000 and €31,000: the first €11,000 is tax-free, the part between €11,000 and €18,000 is taxed at 20 percent and the part above €18,000 is taxed at 32.5 percent. This continues up to salary parts of more than one million euros, on which 55 percent of the tax has to be paid.
Cold progression takes effect when you jump to the next rate level
The cold progression now mainly affects those people who are close to the threshold of a higher tariff level. If they receive a salary increase (for example as a result of the annual pay rounds), they fall into a higher pay scale. They pay a higher tax rate on at least part of their additional income. Result: less of the gross increase remains net. The more workers move up to higher wage levels through wage increases, the more the state skims off the wage increases. This effect is called cold progression – “cold” because it requires no active action or load increase.
If there is a high inflation in addition to the actual cold trend, the effect for the affected citizens is enhanced. For example, if the goods in the supermarket become significantly more expensive, not only does the net wage increase less than the gross wage – there may even be real wage losses.
On average 24 euros more per month
Therefore, for people, the abolition of the cold progression would be noticeable in the fact that the tax-free salary would increase, and also all rate levels would be shifted upwards. The average monthly income of Austrians in 2020 was 2161 euros gross, about 24 euros more would be paid out net.
If you want to abolish the cold progression, the tariff levels and subsequently the deductions would have to be adjusted annually in line with inflation. This happens, for example, in Switzerland, France or the US. But such a measure has also been criticized: it is expensive for the finance minister in general and workers’ representatives recently feared that this political move would put them at a disadvantage in the negotiations on the pay round in the autumn.