For middle incomes, the relief provided by the system introduced in 2023 is similar to what would have been provided by an automatic full adjustment. Overall, the government spent slightly more budget funds on the compensation than would have been the case with an automatic full adjustment.
The so-called cold progression, a creeping tax increase, was abolished in the area of wage and income tax at the beginning of 2023. Since then, the tax brackets have been adjusted every year to the respective inflation rate so that taxpayers no longer slip into higher tax brackets as a result of the annual wage increases. However, only two-thirds of the adjustment of the tariff brackets is automatic. The government decides on the distribution of the remaining additional revenue.
In a response to a query to Green MP Jakob Schwarz, Parliament’s budget service compared the distributional effect of the compensation between 2023 and 2025 with that which would result from an automatic full adjustment of the tax rate brackets to inflation. The result: Due to the actual progression compensation, the relief for household incomes in the lowest income decile was on average 2.1 percent higher and in the second decile 0.7 percent higher than in the fictitious scenario with a full adjustment of the rate brackets. This is mainly due to the child supplement for single earners or working single parents and the increase in the additional child allowance.
In the middle income deciles, the differences between the two scenarios are small. In the upper income deciles, however, the average household income would be somewhat higher with an automatic full adjustment because high incomes would benefit particularly strongly from the additional adjustment of the tariff levels. The total volume of bracket creep compensated in 2025 amounts to EUR 7.8 billion. Compared to an automatic full adjustment, the total volume is EUR 183 million or 2.4% higher, according to the Budget Service‘s calculations.
“The end of bracket creep was promised for decades – we have finally implemented it,” said Green MP Schwarz, commenting on the Budget Service’s study. Instead of adjusting the tax brackets completely automatically to inflation, which would particularly help high earners, a model was designed “that allows us to provide targeted support to people with low incomes through specific measures,” he said in a written statement to the APA. The Budget Service’s analysis shows that this works: “In comparison to blindly increasing the tax brackets, single earners, single parents and people who already have to think twice about every penny will benefit many times more thanks to the so-called social third,” said Schwarz. The MP also referred to the planned extension of the monthly special payment of 60 euros per child (up to 18), which will be decided on Wednesday in the National Council.
ePaper
– How does the 2023 tax reform affect middle-income households in terms of bracket creep?
The End of Bracket Creep: How the 2023 Tax Reform Benefits Middle-Income Households
The introduction of a new tax system in 2023 has brought relief to middle-income households, with the government spending slightly more on compensation than would have been the case with an automatic full adjustment. This reform has put an end to the so-called “cold progression,” a creeping tax increase that occurs when tax brackets are not adjusted for inflation, causing taxpayers to slip into higher tax brackets as their wages increase.
Understanding the Automatic Adjustment of Tax Brackets
Since 2023, tax brackets have been adjusted annually to the respective inflation rate, ensuring that taxpayers do not fall into higher tax brackets due to wage increases. However, only two-thirds of the adjustment of tax brackets is automatic, with the government deciding on the distribution of the remaining additional revenue.
Comparing the Distributional Effect of Compensation
A recent study by the Budget Service compared the distributional effect of the compensation between 2023 and 2025 with that of an automatic full adjustment of tax brackets. The results show that the relief provided to household incomes in the lowest income decile was 2.1% higher, and in the second decile, 0.7% higher than in the fictitious scenario with a full adjustment of tax brackets. This is primarily due to the child supplement for single earners or working single parents and the increase in the additional child allowance.
The Impact on Middle-Income Households
In the middle-income deciles, the differences between the two scenarios are minimal. However, in the upper-income deciles, the average household income would be slightly higher with an automatic full adjustment, as high-income earners would benefit strongly from the additional adjustment of tax brackets. The total volume of bracket creep compensated in 2025 amounts to EUR 7.8 billion, with the government spending EUR 183 million or 2.4% more than would have been the case with an automatic full adjustment.
Targeted Support for Low-Income Households
Green MP Jakob Schwarz, who requested the study, commented that the government’s approach allows for targeted support to low-income households through specific measures. “Instead of adjusting the tax brackets completely automatically to inflation, which would particularly help high earners, we designed a model that provides targeted support to people with low incomes,” he said.
Extension of Child Allowance
The government is planning to extend the monthly special payment of 60 euros per child (up to 18), which will be decided on in the National Council. This move is expected to benefit low-income households further.
Conclusion
The 2023 tax reform has brought significant relief to middle-income households, with the government spending more on compensation than would have been the case with an automatic full adjustment. By targeting support to low-income households through specific measures, the government has ensured that those who need it most benefit from the reform. As the economy continues to evolve, it is essential to monitor the impact of this reform and make adjustments as necessary to ensure that the tax system remains fair and equitable.
Keywords:
Tax reform
Bracket creep
Inflation
Tax brackets
Middle-income households
Low-income households
Child allowance
Government spending
Meta Description:
Learn how the 2023 tax reform has benefited middle-income households and put an end to bracket creep. Discover how the government’s approach has targeted support to low-income households and understand the implications of this reform.
H1: The End of Bracket Creep: How the 2023 Tax Reform Benefits Middle-Income Households
H2: Understanding the Automatic Adjustment of Tax Brackets
H2: Comparing the Distributional Effect of Compensation
H2: The Impact on Middle-Income Households
H2: Targeted Support for Low-Income Households
H2: Extension of Child Allowance
* H2: Conclusion
Be experienced under an automatic full adjustment. However, the mixed approach may create variability in relief based on government decisions and economic conditions.
The 2023 Tax Reform: How Does it Affect Middle-Income Households in Terms of Bracket Creep?
Meta Description: The 2023 tax reform aims to provide relief to middle-income households by adjusting tax brackets to combat bracket creep. But how effective is this approach?
Keywords: Tax reform, bracket creep, middle-income households, tax brackets, inflation, income tax, compensation, budget service, parliament, government, automatic full adjustment.
The 2023 tax reform introduced a new system to combat bracket creep, a phenomenon where taxpayers are pushed into higher tax brackets due to inflation, resulting in a higher tax burden. But how does this reform affect middle-income households, and is it effective in providing relief?
Understanding Bracket Creep
Bracket creep occurs when the tax brackets are not adjusted to inflation, causing taxpayers to fall into higher tax brackets despite no increase in their real income. This phenomenon results in a higher tax burden, reducing the purchasing power of individuals and families. The 2023 tax reform aimed to address this issue by introducing a new system to adjust tax brackets to combat bracket creep.
The New System: A Mixed Bag
The new system adjusts tax brackets annually based on the inflation rate, preventing taxpayers from falling into higher tax brackets. However, only two-thirds of the adjustment is automatic, with the remaining one-third decided by the government. This approach allows for targeted support to specific groups, such as low-income households and single parents, through measures like the child supplement and additional child allowance.
Comparing the New System to an Automatic Full Adjustment
A recent study by the budget service compared the distributional effect of the new system to an automatic full adjustment of tax brackets. The results showed that, for middle-income households, the relief provided by the new system is similar to what would
