Germany's Lindner plans 23 billion euros in income tax relief through 2026

By Christian Kraemer

FRANKFURT (Reuters) -German Finance Minister Christian Lindner plans to implement personal income tax cuts totalling 23 billion euros ($25 billion) through 2026 to mitigate a creeping burden from inflation, he said on Wednesday.

The cuts are designed to offset fiscal drag, also known as "cold progression", whereby inflation leads to a higher average percentage of taxes over income, due to the country's system of income tax rates that rise with income.

Unlike in several other major economies such as the U.S., Canada and Switzerland, thresholds in Germany's progressive tax system are not automatically inflation adjusted.

"It is simply a matter of fairness to adjust the tax system to inflation. The state must not be the winner of inflation," Lindner said at a news conference.

Germany passed a law in 2022 to compensate for sky-rocketing inflation following the war in Ukraine through tax adjustments for 2023 and 2024. Lindner now wants to continue to be able to adjust income-tax rates to provide relief to citizens in 2025 and 2026.

Under the plan, the tax-free allowance would rise in three steps until 2026 and the level of income that triggers the highest tax rate would also be lifted, said a finance ministry source.

From 2026, annual tax relief would then rise to about 13.3 billion euros compared to 2024, according to the source.

In Germany, cooling energy and food prices have had an easing effect on inflation this year, but core inflation, which excludes those more volatile elements, has remained high.

The newspaper Bild first reported on the relief amount.

COALITION SCEPTICS

The move could further limit the government's budget flexibility as Lindner, leader of the pro-business Free Democratic Party, is also a fiscal hawk who routinely resists higher spending plans proposed by his coalition partners, the social democrats party SPD and the Greens.

"There is a budget gap of over 25 billion, which is also causing us difficulties with defence and infrastructure investments," said Greens lawmaker Katharina Beck.

"To bring general tax cuts in the double-digit billion range into play in this context is dubious," added Beck.

The SPD's Michael Schrodi also said that budget talks were not a one-way street and the finance ministry also needed to prioritize instead of just referring to the other ministries.

The International Monetary Fund said last month that Germany needs to boost public investment and should consider easing its debt brake, which limits public deficits to 0.35% of gross domestic product.

($1 = 0.9201 euros)

(Writing by Miranda Murray and Ludwig Burger; Editing by Shri Navaratnam, Hugh Lawson and Sriraj Kalluvila)