The wage indexation and the non-indexation of the tax table are both frequently discussed at the moment.
The index is well-known to Luxembourgers and cross-border commuters alike: every time inflation reaches 2.5%, wages, salaries, and pensions increase by the same amount. The last one was made on 1 February 2023 and the next one is already due on 1 April. The latter represents one that was postponed from last year as part of the most recent tripartite agreement between government and its social partners.
The non-indexation of the tax table is more complex, but it continuously affects the index and the pay rise granted by employers.
When a wage indexation is triggered, workers earn more. But, since the tax table remains unchanged, the effect is somewhat limited: the more money you earn, the more taxes you pay. This means that with each index workers and pensioners end up getting less than the promised 2.5%.
“It is high time that this creeping and hidden tax increase comes to an end,” argued unions OGBL, LCGB, and CGFP only a few days ago. “Without adjusting the table, this purchasing power is only compensated at the gross level, while it continues to decrease at the net level.”
The unions are thus united in their demand that the government adjust the tax table to inflation. A separate meeting with Prime Minister Xavier Bettel is even planned days before the next tripartite meeting, which starts on 3 March.
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In an analysis published on Thursday, the Idea Foundation confirms that “the indexation of the tables would ensure the neutrality of the tax system with respect to inflation”. Without this additional indexation, the tax surplus affects everyone. But with it, low income households would be spared. And for everyone else, taxes would rise less quickly than they do at the moment.
However, according to the Foundation, the indexation of the table also has disadvantages. For instance, high and medium incomes benefit more substantially than lower ones. The other limitation is the cost for the state, which receives more tax revenue with each indexation applied without adjusting the table.
In a recent interview with RTL Radio, Minister of Finance Yuriko Backes was clear that she considers an adjustment of the tax table irresponsible at this time. She explained that Luxembourg is currently in an economic crisis and that from a structural point of view, the proposed adjustment would cost “more than €1 billion” and therefore burden the state budget for years to come.
Although the Idea Foundation considers the measure “well-founded in the long run”, it does not consider it “urgent in the present context” although the pandemic and the war in Ukraine have caused prices to soar for more than a year already.
According to the Foundation, the indexation of the tax table can wait because the tax surplus levied from each worker and pensioner allows the state to build up reserves to be used intelligently.
This “room for manoeuvre” is useful in emergencies to help those in need. This was the case, for instance, with the last tripartite agreement, the measures of which are said to have had a positive impact on Luxembourg’s economy. The Foundation also considers it useful “for the indispensable environmental transition, the digital transition, or the financing of infrastructure that will guarantee more sustainable economic growth in Luxembourg”.
Despite this analysis, workers and pensioners might still prefer to have this money go straight into their wallets rather than being redistributed at a later stage.
