Progression reservation

Progression reservation is a term from tax law. It describes the process that certain tax-free income can increase the tax rate .

There is a progression proviso in the income tax law of Germany , Austria , Switzerland and other countries.

purpose

The progression proviso is justified by the principle of performance-based taxation. Tax-free income also increases tax performance. According to current legislation and case law, this justifies a higher tax rate.

Probably the most common case of tax-free income that is subject to the progression proviso is the receipt of unemployment benefit I.

calculation

In the first step, the income tax and the average tax rate are determined for the income including the tax-free income. In the second step, the tax rate determined in this way is applied to the income without the tax-free income.

Germany

Additional tax through
tax-free income with progression reservation (s)
in the assessment year 2015

taxable income (E)	tax-free income (s)	additional tax	as a percentage of e
00000EUR 0 to EUR 003475	04997 EUR	0000 EUR	0%
		increasing
008472 EUR		0596 EUR	almost 12%
013,469 EUR		0658 EUR	almost 14 %
		falling
022593 EUR to 024553 EUR		595 EUR	almost 12%
		increasing
047,884 EUR		0722 EUR	almost 15 %
052,881 EUR		0713 EUR	almost 15 %
		falling
245,733 EUR		0164 EUR	almost 04%
250 730 EUR		0307 EUR	almost 07%
		falling
999978 EUR to 999999 EUR		0078 EUR	almost 02%
013,469 EUR	39,412 EUR	2615 EUR	almost 07%
052,881 EUR		3584 EUR	almost 10%
		falling
206321 EUR		1346 EUR	almost 06%
245,733 EUR		2215 EUR	almost 06%
		falling
EUR 998000 to EUR 999999		0608 EUR	almost 02%

Tax-free income subject to progression

According to German income tax law, the progression proviso is u. a. the following tax-exempt income / receipts:

• Unemployment benefit (ALG I), but not unemployment benefit II

• Short-time allowance

• Bankruptcy money

• Transitional allowance

• Age transition allowance (benefits according to the partial retirement law )

• Parental allowance

• Statutory health insurance sick pay

• Maternity allowance

• Injury benefit , but not injury pension

• Income that is tax-exempt under an agreement to avoid double taxation or another international agreement, but for which this agreement provides for the progression proviso in Germany. As of 2008, this only applies to a limited extent within the EU / EEA: here, both positive and negative progression reservations are in some cases no longer applied if they result from income from agriculture and forestry , commercial operations , renting and leasing or leasing of ships.

Concrete calculation

If, in addition to the taxable income , there is also income subject to the progression proviso ( ), a fictitious collectively agreed income tax is first determined for an income of . This results in the "special tax rate" ${\displaystyle (E)}$ ${\displaystyle e}$ ${\displaystyle e+E}$

${\displaystyle {\bar {s}}={\frac {S(e+E)}{e+E}}}$

This is the average tax rate on a taxable income of . With this , the tax for the originally taxable income is calculated as ${\displaystyle e+E}$ ${\displaystyle {\bar {s}}}$ ${\displaystyle (E)}$

${\displaystyle {\bar {S}}(E,e)=E\cdot {\bar {s}}}$.

When adding (e) the employee lump sum is taken into account (deducted from e), unless it was already deducted when determining the income from employment (as part of E).

The fictional and actual income tax and is in each case rounded to whole Euro and the rate ( ) to four decimal places (when expressed as a percentage) is rounded. ${\displaystyle S(e+E)}$ ${\displaystyle {\bar {S}}(E,e)}$ ${\displaystyle {\bar {s}}}$

Example of a calculation

Example (for a single person in 2018)

	Tax without tax-free income	Tax on tax-free income	Control with progression reserve
Taxable income (zvE1 = E)	€ 50,000	€ 50,000	€ 50,000
Income subject to the progression clause (e)	0 €	€ 6,000	0 €
Relevant taxable income (zvE2 = E + e)	€ 50,000	€ 56,000	€ 50,000
Rounded down to full euros	€ 50,000	€ 56,000	€ 50,000
Applicable tax according to the basic table	€ 12,432	€ 14,898
Average tax rate in percent	24.864%	26.60357%
Truncated after the fourth place after the comma		26.6035%
Applicable tax rate in percent		26.6035%	26.6035%
Tax = applicable tax rate x zvE1	€ 12,432		€ 13,302
Additional tax burden:			€ 870

Conclusion: The € 6000 tax-free income leads to an income tax of € 870 higher.

Mathematical peculiarities

The formula for the rounding is:

${\displaystyle {\bar {S}}(E,e)={\text{Abrunden}}(E*{\text{Abrunden}}({\text{Abrunden}}(S(e+E);0)/(e+E);6)-{\text{Abrunden}}(S(E);0);0)}$

Due to these roundings deviates by up to one euro. This can result in a slight reduction in the tax burden for small . ${\displaystyle {\bar {S}}(E,0)}$ ${\displaystyle {\text{Abrunden}}(S(E);0)}$ ${\displaystyle e}$

The more tax to be paid through tax progression is:

${\displaystyle {\bar {S}}(E,e)-S(E)=E\cdot {\bar {s}}-S(E)}$

The following tax function has been used in Germany since 2002

${\displaystyle S(E)=a\cdot (E-d)^{2}+b\cdot (E-d)+c}$

Using this one gets:

${\displaystyle {\bar {S}}(E,e)-S(E)=e\cdot [Ea+((b-ad)d-c)/(e+E)]}$

The resulting increase in tax can now be compared to the tax-free income (e).

This then gives an average tax rate as follows:

${\displaystyle ({\bar {S}}(E,e)-S(E))/e=Ea+((b-ad)d-c)/(e+E)}$

The actual marginal tax rate for additional tax-free income is calculated accordingly ${\displaystyle (e)}$

${\displaystyle \lim _{e\mapsto 0}({\bar {S}}(E,e)-S(E))/e=\lim _{e\mapsto 0}Ea+((b-ad)d-c)/(e+E)=Ea+((b-ad)d-c)/E}$

For the zones of the tax function in which there is, the marginal tax rate is falling in : the higher the taxable income , the less tax is to be paid on each additional euro tax-free income with progression proviso. In the zones in which there are opposing effects, the marginal tax rate has exactly one local and at the same time global extreme for these parameters. Depending on the parameters, these are inside / outside the zone. The details of the current parameters are shown in the table below. ${\displaystyle a=0}$ ${\displaystyle E}$ ${\displaystyle (E)}$ ${\displaystyle (e)}$ ${\displaystyle a\neq 0}$

The simplification cannot be applied if the calculation of the tax of e and that of e + E takes place in different zones of the tax function.

Parameters in 2016

ZvE area (benchmarks)		Legal stipulation				Marginal tax rate on tax-free income
from [€]	to [€]	a [1 / €]	b	c [€]	d [€]	(b-ad) d - c [€]	Zone start	course	End of zone
0	8652	0	0	0	0	0	0	0	0
8653	13669	993.62   10 −8 ${\displaystyle \cdot }$	0.1400	0	08652	15427/33	14%	increasing up to	17.0018%
13670	53665	225.4   10 −8 ${\displaystyle \cdot }$	0.2397	952.48	13669	2323.9793	17.0018%	falling to the minimum of 13% at 29,055 euros rising again to	15.6418%
53666	254446	0	0.4200	−8394.14	0	8394.14	15.6418%	falling up to	3.2989%
254447	∞	0	0.4500	−16027.52	0	16027.52	6.2989%	falling up to	almost 0%

See also

• Tax progression

Web links

• Bayer's progression reservation calculator. State Office for Taxes (for the last six years up to and including the current year)

Austria

Austria basically knows the progression proviso in two forms:

1. If the respective double taxation agreement provides for it, the foreign income (converted to Austrian tax law) is initially taxed and an arithmetical average rate is determined. The taxable income in Austria is then taxed at this average rate.

2. In the case of certain domestic issues, the most important of which are periods of unemployment, the income from the rest of the period (in which no tax-free income components were received) is extrapolated to 365 days and the tax is calculated from this notional income. Here, too, an average rate is determined (fictitious tax divided by fictitious income), by which the taxable income is then multiplied. At the same time, a control calculation is carried out to determine which tax would result if the tax-free income components were taxable. The result that is more favorable for the taxpayer is used. This is particularly applicable if the wage replacement benefits are very low in relation to the taxable income components.

Individual evidence

1. ↑ according to § 32b EStG
2. ↑ § 32b Paragraph 1 Clause 2 No. 1 to No. 5 Income Tax Act (EStG) must be observed.
3. ↑ Wording from Section 32b EStG
4. ↑ Section 32a (1) EStG in the version dated January 1, 2016

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