Bracket Creep Burdened German Taxpayers by EUR 10.9 Billion in 2022

The additional tax burden has been borne primarily by the middle class and higher income groups. Disregarding the offset, bracket creep cost private households an average of just under EUR 325 in 2022. This corresponds to 0.7 percent of their disposable annual income. The top 10 percent of earners paid almost EUR 1,000 more in income tax (including the solidarity surcharge), or roughly 0.9 percent of their annual income. The upper middle class – i.e., taxpayers with around EUR 60,000 in disposable income – bore the highest burden relative to their average annual income. “Bracket creep” refers to how taxpayers slip into a higher tax bracket – but only because their nominal income has risen, which is then offset by inflation. The result is that they pay more taxes but have less real income.

“In eliminating bracket creep, policymakers shouldn’t limit themselves to merely compensating for inflation. It would make more economic sense to offset it through growth in nominal income. Instead of the inflation rate, this would take into account the average growth of nominal incomes,” says Florian Dorn, ifo researcher and coauthor of the study. Otherwise, the government would claim an increasing share of national income even if real incomes rise without inflation. “Bracket creep should be dealt with via automatic inflation compensation, in what Germany calls a ‘tariff on wheels’. This means the tax brackets are automatically adjusted annually in line with the growth in nominal income,” Dorn says.