2024-03-01 19:05:53
This article was originally published in English
The tax burden on the middle class differs between EU countries, as well as between different income segments.
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Britain’s middle classes continue to face economic hardship despite annual incomes of up to €70,180, according to a recent report.
In many OECD countries, the middle classes have seen their saving capacity decline and, in some cases, fallen into debt, while the tax burden on the European middle class is becoming increasingly controversial in the context current cost of living crisis.
The income and tax burden of the middle class differ significantly between European countries. In general, lower middle class incomes are taxed less, while upper middle class incomes are taxed more.
Household size and number of employees also have an impact on tax rates.
Euronews Business looks at the tax burden of the middle class, based on a set of data from the Economic Review, “EconPol Forum”to determine where in Europe the middle class has the highest purchasing power, and where they pay the highest and lowest taxes.
Who is the middle class?
Before examining the data, it is important to look at the definition of a few key terms.
According to the OECD definition, the middle class refers to households with income between 75% and 200% of the median national income. It is divided into three subcategories:
- The lower middle class: income between 75% and 100% of the median national income
- Intermediate middle class: income between 100% and 150% of the median national income
- Upper middle class: income between 150% and 200% of the median national income
Household disposable income is what households have available to spend and save following taxes and transfers. The size of a household and the age of its members are taken into account to weight households in order to better compare them.
In which country does the middle class have the highest disposable income?
In 2019, it was in Luxembourg that the middle class had the highest disposable income, between €30,618 and €81,649, depending on “EconPol” which is based on the EU Statistics Survey on Income and Living Conditions.
Conversely, Bulgaria has the lowest average household income among European countries. The disposable income of the middle class varied from €2,908 to €7,755.
The chart above shows the huge differences in disposable income between EU member states and the UK in nominal terms.
If we consider household disposable income in purchasing power standard (PPS), the level of differences compared to nominal terms has decreased, but there are still large disparities.
The disposable income in SPA allows a fairer comparison, because the cost of living varies considerably in Europe. This means that households can consume a different amount of goods and services in different countries with the same income.
In 2019, Luxembourg’s middle class recorded the highest purchasing power: around twice as high as the EU average.
The middle classes in Austria and Germany also benefited from purchasing power around 40% higher than the EU average. France, Ireland, Italy and the United Kingdom had purchasing power close to the EU average.
The middle classes of Eastern European countries occupied the bottom quarter. Bulgaria and Romania recorded the lowest average household incomes in the EU, just above 50% of the EU average.
What is the effective tax burden?
The effective tax burden of middle-class households includes income tax, mandatory social contributions and social transfers received.
Based on calculations by Mathias Dolls, Florian Dorn, David Gstrein and Max Lay from the institute “Ifo” Munich-based Euronews Business examines three different scenarios.
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1. Dual-income families with two children
Lower middle income families with two equal incomes (double salary) and two children received net benefits in Belgium (-14%), France (-5%), Greece (-4%), Estonia (- 3%) and in Ireland (-2%).
These negative rates mean that families received more social benefits that more than offset their tax and social security contribution payments.
The effective tax burden on families is highest in Denmark and Slovenia, with an average of 29% and 22% for the lower middle classes, 34% and 30% for the middle middle classes, and 37% and 35% for the upper middle classes.
The case of Belgium is remarkable, because the tax burden varies considerably from one segment of the middle class to another.
While upper-middle class families had to pay one of the highest tax rates (over 33%), this rate was less than 20% in the middle group and -14% for the lower middle class .
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2. Single-income families with two children
Lower-middle-income families with one earner and two children in France and Czechia were net recipients of transfers and therefore experienced a negative burden (net relief).
The burden was above 20% in Finland, Denmark, Lithuania, Slovenia, the Netherlands and Slovakia.
Denmark, the Netherlands and Finland had the highest tax burden in both the middle class and the upper middle class in this scenario.
3. Single households
On average, single households in the EU pay more taxes than families in all segments of the middle class.
This is not surprising for two main reasons, according to the Forum “EconPol” : they mainly benefit from less social benefits than families due to the absence of family-related transfers, including family allowances.
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Families also have more opportunities for tax relief through joint spousal taxation and family allowances.
In 2019, Denmark, Belgium, Slovenia and Germany had the highest tax rates for single households. In all four countries, this rate was above 40% for middle- and upper-middle-class households.
The tax burden on single households was lowest in Cyprus, Romania and Estonia.
Dual-working families with two children have the lowest tax burden
If we compare these three hypotheses, it is dual-income families with two children who have the lowest tax burden. On average, the effective tax burden in the EU was only 6% for the lower middle class segment, while it was 17% in the middle group and 24% in the upper middle class.
For a single-income family with two children, these rates were 12%, 23% and 29%, respectively.
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The tax burden was significantly higher for single households than for families. It was 26% in the lower middle class, 32% in the middle class and 35% in the upper middle class.
The table below presents the three scenarios for each middle class segment, allowing an overall comparison between EU Member States.
OECD calls for overhaul of tax and benefit systems
An OECD report entitled “Under Pressure : The Squeezed Middle Class” reveals that the costs of some goods and services, such as housing, which are essential to the middle-class lifestyle, have risen faster than wages and overall inflation in recent decades.
Middle class once meant the assurance of living in a comfortable home and affording a rewarding lifestyle for many generations.
“However, there are signs today that this foundation of our democracies and economic growth is no longer as stable as in the past,” warns the OECD.
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The lower middle class believes that the current socio-economic system is unfair, according to the report published in 2019. “This can be remedied by reviewing and adapting the tax and compensation system”the report says.
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