The middle class in many OECD countries has seen their ability to save reduced and, in many cases, put into debt, as the tax burden in EU countries becomes increasingly controversial in the current cost of living crisis.
The income and tax burden of the middle class varies significantly between European countries. In general, lower-middle incomes are taxed less, while upper-middle incomes are taxed more.
The average tax burden on the middle class in Romania, Cyprus, Bulgaria, Estonia, Portugal, Spain and Greece was lower than the EU average
Household size and number of employees also affect tax rates.
Euronews Business examines the tax burden on the middle class, based on a dataset from the economic magazine EconPol Forum, to find out where in Europe the middle class has the highest purchasing power and where it pays the highest and lowest taxes.
Who is the middle class?
Before looking at the data, though, it’s important to look at how the middle class is defined economically.
According to the OECD, the middle class refers to households with an income between 75% and 200% of the national median income. It is divided into three subcategories:
Lower middle class: Income between 75% and 100% of the average national income.
Middle middle class: Income between 100% and 150% of the national average income.
Upper middle class: Income between 150% and 200% of the average national income.
Household disposable income is what they have available for spending and saving, after taxes and transfers. The size of a household and the ages of its members are also taken into account.
In which country does the middle class have the highest disposable income?
In 2019, the middle class in Luxembourg had the highest disposable income, which ranged between €30,618 and €81,649, according to EconPol based on the “EU Statistics on Income and Living Conditions” survey.
In contrast, Bulgaria had the lowest average household income among European countries. Here, the disposable income of the middle class ranged from €2,908 to €7,755.
Greece ranks ninth with the disposable income of the middle class ranging from 6,304 euros to 16,810 euros.
The chart above shows the huge differences in disposable income between EU member states and the UK in nominal terms.
What is the real tax burden?
The real tax burden on middle-class households includes income taxes, statutory social security contributions and social benefits they receive.
Based on calculations by the ifo Institute in Munich, Euronews Business examines three different scenarios:
1. Families with two workers and two children
Lower middle-income families with two equal incomes and two children received net benefits in Belgium (-14%), France (-5%), Greece (-4%), Estonia (-3%) and Ireland (-2%).
These negative rates meant that families received more social benefits, which more than offset their tax payments and social security contributions.
Families in Denmark and Slovenia had the highest effective tax burden, with the lower middle class averaging 29% and 22%, the middle group 34% and 30%, and the upper middle class 37% and 35%, respectively.
The case of Belgium is notable as the tax burden varied significantly between sections of the middle class.
While upper middle class families had to pay one of the highest tax rates (over 33%), it was less than 20% in the middle group and -14% for the lower middle class.
2. Families with one worker and two children
Low-middle-income families with only one worker and two children in France and the Czech Republic were net recipients of benefits and thus faced a negative burden.
The burden was over 20% in Finland, Denmark, Lithuania, Slovenia, the Netherlands and Slovakia.
Denmark, the Netherlands and Finland had the highest tax burden on both the middle and upper middle classes in this scenario.
In Greece they had a low burden in the lower middle class of 2%, but a higher burden of 22% in the middle class and 30% in the upper middle class.
3. Single person households
On average, single-person households in the EU pay more tax than families in every segment of the middle class.
This is not surprising for two main reasons, according to the EconPol Forum: They receive fewer social benefits than families due to the absence of family-related payments, including child benefits.
Families also have more potential for tax relief, through joint tax returns for spouses and child benefits.
In 2019, single-person households had the highest tax rates in Denmark, Belgium, Slovenia and Germany. It was over 40% in middle and upper middle class households in these four countries.
Cyprus, Romania and Estonia had the lowest tax burden for single-person households, while Greece is somewhere in the middle with the tax burden ranging from 22% to 32%.
Families with two employees and two children had the lowest tax burden
When we compare these three cases, we find that families with two wage earners and two children had the lowest tax burden.
On average, the real tax burden in the EU was just 6% for the lower middle class segment, while it was 17% for the middle group and 24% for the upper middle class.
For a single-parent family with two children, these percentages were 12%, 23% and 29% respectively.
The tax burden was significantly higher for single-person households than for families. It was 26% in the lower middle class, 32% in the middle and 35% in the upper middle class.
The OECD urges a review of the tax and benefits system
An OECD report, “Under Pressure: The Squeezed Middle Class,” found that the cost of some goods and services, such as housing, that are essential to a middle-class lifestyle, rose faster than earnings and the overall inflation in recent decades.
Middle class once meant the certainty of living in a comfortable home and being able to secure a satisfactory lifestyle for many generations.
“However, there are now signs that this foundation of our democracies and economic growth is not as solid as it once was,” the OECD warns.
The lower middle class feels that the current socio-economic system is unfair, according to the report, which was published in 2019. “This can be addressed by revising and adjusting the tax and benefit system,” it noted.
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2024-03-10 15:21:28
