Abolition of cold progression – inflation relief package II and III
The Council of Ministers recently passed the government bill for the inflation relief package Part II. The aim of the planned amendment to the Income Tax Act is to provide for inflation-neutral income taxation by abolishing the “cold progression”.
The Austrian Income Tax Act has so far been based on the so-called nominal value principle, according to which only the numerical (nominal), but not the actual (real) monetary value of income is decisive for income taxation. In view of the progressive income tax scale, higher nominal incomes lead to a higher income tax burden if parts of the income fall into tax brackets that are unchanged in amount but higher.
This effect is referred to as “cold progression” and leads to an increase in the tax burden with – in view of increased prices – unchanged income in real terms. Therefore, less of the gross increase remains net in the previous year’s comparative value.
Abolition of the cold progression
In order to counteract this adverse effect, the Council of Ministers decided on 14 September 2022 to abolish the cold progression and, through the planned amendment to the Income Tax Act, to raise the marginal amounts of the first two tax brackets in the amount of the inflation rate (by 6.3 %) as of 1 January 2023. Thus, the threshold for income tax liability in the coming year 2023 will be EUR 11,693 (previously EUR 11,000).
In order to also relieve middle and higher incomes, it is planned to increase the marginal amounts of the other tax brackets (with the exception of the top tax rate) by two-thirds of the inflation rate. This corresponds to an adjustment of 3.47 %.
Indexation of social benefits
In view of persistent inflation rates, social benefits are also to be valorised as of 1 January 2023. The single-earner, single-parent and maintenance deductions, pensioner deductions and transport deductions are to be automatically adjusted by two-thirds of the inflation rate.
Social and family benefits, such as sickness, rehabilitation and retraining allowances, study grants, family allowances, multiple child supplements and child deductions are to be increased for the first time in accordance with the annual automatic valorisation in line with the adjustment factor for statutory pensions (section 108 f ASVG).
All in all, this is a very positive legislative project. However, it remains to be seen whether the law will be passed.