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Will inflation force tax changes in Austria from 2023?

Will inflation force tax changes in Austria from 2023?
Readers of The Local shared their inflation-busting tips. Photo: picture alliance/dpa | Moritz Frankenberg

There is a possibility that Austria’s so-called cold progression - which means tax brackets are not adjusted for inflation - could be abolished by next year.

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Austria’s Finance Minister Magnus Brunner has told journalists that an abolition of the cold progression tax system could be a possibility as soon as 2023, and that a working group has been set up to look into it.

This is a surprise development for many as Brunner has previously stated his opposition to the plan, which was already part of the government’s programme.

A report by Die Presse says Brunner has previously voiced concerns that getting rid of cold progression would primarily benefit higher earners.

The reason why Brunner is now considering an end to cold progression is reportedly due to rising inflation in Austria, which is currently at almost 7 percent. The annual average rate of inflation is expected to be 6 percent.

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According to the Kronen Zeitung, experts have long called for payroll tax levels to be automatically adjusted with inflation.

Austria’s deficit is also expected to rise to 3 percent this year rather than 2.3 percent as previously anticipated. The debt ratio will not fall below 80 percent of gross domestic product (GDP) as planned for this year.

The budget planning is affected by high energy prices and the war in Ukraine, and Brunner does not expect there to be a balanced budget in Austria until 2026.

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What is cold progression?

Cold progression is a tax term used to describe an increased tax burden. It happens when progressive tax brackets (which is Austria's income tax system) are not adjusted in line with inflation and disposable income gradually decreases. 

Cold progression has also been referred to as a "hidden tax" because even though incomes rise, people's purchasing power does not as prices continue to rise. However, at the same time, the government collects more money in tax as more people enter a higher tax bracket.

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