What does 3 percent more pay?
A survey by Kienbaum among companies in over 26 countries is noisy FAZ.net that the Germans can adjust to a relatively high increase in wages. According to this, income is to rise by an average of 2,9%.
But is this increase ultimately also a purchasing power gain or is a large part consumed by taxes and inflation? The following article deals with this question somewhat more precisely.
The Kienbaum forecast - an overview
For the Kienbaum forecast were more than 1.000 Company interviewed. At first, the result is more than encouraging for German employees: there is an increase of 2,9% of the gross salary. The reasons lie mainly in the following facts:
- In Germany, a stable business development can be observed
- The economic outlook is cautiously optimistic
With this increase in gross national income, Germany is, according to the survey, the European top group. Only in Norway is the increase with 3,2% in the year 2016 even stronger. At first glance, a very generous wage increase, which could stimulate demand and thus possibly the economy as well.
Bruttolohn rise and inflation rate - what remains in the end?
One wage increase the bottom line is only really helpful if they can buy more of the growth. However, since the costs in terms of prices are also dynamic, the sole increase in wages does not say too much.
For a more precise picture, therefore, the consideration of the inflation rate is incessant. According to the above-cited Kienbaum study, this should amount to 2016% in the year 1,6, which would result in an average increase in real wages of 1,3%. According to experts from the comparison portal Tarifcheck24.com such a rate is no longer so special:
Figure 1: Nominal increase in salary and reallocation in comparison, source: Federal Statistical Office.
Lastly, therefore, there were even significantly higher rebate increases than the expected 1,3% next year. This was the increase in the 2. Quarter 2015 for example with 2,7%. However, the main reason for this is the very low inflation rate:
Figure 2: Consumer price index 2015, respective change over previous year, Source: Destatis.de
Not everyone profits from low prices
Even though the rate of inflation is ultimately an average for many different goods and services, not everyone benefits from a low price increase.
A small example should clarify this: According to an analysis on ADAC.de the price for the gasoline Super E10 2015 was at a much lower level than 2014:
- August 2015: 1,402 Euro per liter
- August 2014: 1,524 Euro per liter
For example, this price reduction has contributed significantly to the low rate of inflation. Nevertheless, motorists of course benefit significantly more from the price reduction than people who are mainly on the road. These can only indirectly benefit because, for example, products are cheaper due to lower transport costs.
Thus, although an increase in real wages may be calculated as the average size of a society, the impact on an individual may sometimes differ significantly.
Is the actual Reallohn rise actually available?
In addition to the inflation rate, there is another factor that limits our purchasing power. This is the income tax. Since this is deducted from both the lower and the higher salary, it is tempting at first glance to neglect them in the consideration. But unfortunately, the tax increases disproportionately with increasing income, which is commonly referred to as progression. There are two different peculiarities:
1. The progressive tax rate (normal progression)
If the tax rate were the same for all taxpayers, someone with an annual income of 40.000 Euro would have to pay exactly twice as much income tax as a taxpayer with a yearly income of 20.000 Euro. The following calculation shows this in more detail:
- assumed tax rate: 20%
- Tax liability for 20.000 annual income: 4.000 Euro
- Tax liability for 40.000 Euro yearly income: 8.000 Euro
Table 1: Sample calculation for the same tax rate for all taxpayers without deduction
In Germany, however, a progressive income tax rate is applied. As a result, taxpayers do not pay the additional amount due to their higher income at the same tax rate, but also a higher proportion. The following statistics shows the tax liability and the average tax rate related to different income situations between 20.000 and 40.000 Euro:
Figure 3: Progressive income tax rates in Germany, source: Einkommensteuertabelle.de
If we compare the tax liability with an income of 20.000 Euro and 40.000 Euro, it soon becomes clear that the difference is much higher:
- Tax liability for 20.000 annual income: 2.634 Euro
- Tax liability for 40.000 Euro yearly income: 8.760 Euro
Table 2: Income tax liability for different annual income (the taxable income is decisive)
The tax liability amounts the tax liability for a taxable annual income of 20.000 Euro currently just at 2.634 Euro. However, anyone who earns 40.000 Euro in the year has a tax liability of 8.760 Euro. This figure is more than three times higher, although income has only doubled.
2. The "cold progression"
The so-called "cold progression" is a phenomenon of the progressive tax rate. In certain income areas, it can happen that an increase in nominal wages leads to a loss of real wages despite the equally high inflation rate. For example, if the annual income of 20.000 Euro rises to 20.400 Euro and the inflation rate is also 2%, real income will be reduced by 108 Euro purely through the higher income tax.
For this reason, it is constantly being asked to compensate for an inflation adjustment on the tax rate and the tariff lines. Thus the cold progression could be confined. These examples show very clearly that rising nominals often almost always entail higher tax burdens. Thus, a part of the wage increase is additionally consumed. This effect is, of course, very positive for the state, as it benefits from higher tax revenues.
The predicted increase in wages by almost 3% next year sounds very spectacular at first glance and also shows that the economic engine is still buzzing. But how much of this is ultimately available to additional purchasing power depends on many different factors. On the one hand, the level of the inflation rate plays an important role.
The more the prices are tightened, the less goods and services the wage-earners can buy with their salary plus. In addition, it should not be forgotten that any increase in wages also consumes a proportion which should not be underestimated for additional income tax payments. The bottom line is that wages are not much more positive than in 2015, because this year people benefit from an exceptionally low rate of inflation.
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