Tax Increases Via the Back Door – Fiscal Revenue Impact of Bracket Creep

Bracket creep (cold progression) weakens the distribution effects of the taxation system and leads to an increase in the tax burden that is no longer under democratic control. In public debates bracket creep is usually only discussed in the narrowest sense of the term, which only takes into account the impact of rising prices. This led to additional tax revenues of 33.5 billion euros over the period of 2011 to 2016. The extent of bracket creep, however, becomes considerably larger if the effect of rising real income is also taken into account. On this basis, total additional tax revenues of 70.1 billion euros were generated between 2011 and 2016. Without further amendments to German law, bracket creep will increase successively if one considers the period through 2030. In response to bracket creep, the authors propose tax rate indexation in the form of a rolling rate.