The tax burden on the middle class varies not only across the EU but also across income categories.
Britain’s middle class continues to face financial hardship despite earning up to £60,000 (€70,180) a year. According to recent reports.
The tax burden on Europe’s middle class has become increasingly contentious in the current cost of living crisis, reducing the ability of the middle class to save and, in some cases, falling into debt in many OECD countries.
Middle-class incomes and tax burdens vary widely across European countries. In general, lower middle income earners pay the least amount of taxes, and upper middle income earners pay the most tax.
Household size and number of income earners also affect tax rates.
Euronews Business examines the tax burden of 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 to find out where the middle class has the highest and lowest taxes. I’m looking into which areas are paying the most.
Who is the middle class?
Before looking at the data, it’s important to review the definitions of some important terms.
The OECD defines the middle class as households with incomes between 75% and 200% of the median national income. This he divides into three subcategories.
- Lower middle class: Income between 75% and 100% of median national income
- Middle class: Income between 100% and 150% of median national income
- Upper middle class: Income between 150% and 200% of median national income
Household disposable income is the income available to a household for spending and saving, excluding taxes and transfers. Household size and member ages are taken into account to weight households to better compare households.
Which country has the highest middle class disposable income?
According to EconPol, based on the EU Income and Living Conditions Survey, Luxembourg’s middle class had the highest disposable income in 2019, between €30,618 and €81,649.
Conversely, average household income in Bulgaria was the lowest among European countries. Here, the disposable income of the middle class varied from 2,908 euros to 7,755 euros.
The graph above shows the huge difference in disposable income between EU member states and the UK in nominal terms.
Looking at household disposable income using purchasing power standards (PPS), although the gap with nominal income has narrowed, there is still a large disparity.
The cost of living varies widely across Europe, so PPS disposable income provides a fairer comparison. This means that households with the same income can consume different amounts of goods and services in different countries.
In 2019, Luxembourg’s middle class recorded the highest purchasing power, almost twice the EU average.
The Austrian and German middle classes also enjoyed around 40% higher purchasing power than the EU average. Purchasing power in France, Ireland, Italy and the UK was close to the EU average.
The middle class of Eastern European countries made up the bottom quarter. Bulgaria and Romania had the lowest average household incomes in the EU, at just over 50% of the EU average.
What is the actual tax burden?
The effective tax burden of middle-class households includes income tax, statutory social security contributions, and social transfers received.
Based on calculations by Matthias Dolls, Florian Dorn, David Gustrein and Max Ray of the Munich-based ifo Institute, Euronews Business is considering three different scenarios. .
advertisement1. A family with two working parents and two children.
Belgium (-14%), France (-5%), Greece (-4%), Estonia (-3%), and Ireland (-2%).
These negative interest rates meant that families received more social benefits than offset their tax payments and social security contributions.
Households in Denmark and Slovenia had the highest effective tax burdens: on average 29% and 22% for the lower middle class, 34% and 30% for the middle class, and 37% and 35% for the upper middle class.
The Belgian case is noteworthy because the tax burden varies considerably among the middle class.
Upper middle class families had to pay the highest tax rate (over 33%), while for the middle class it was less than 20% and for the lower middle class -14%.
advertisement2. Household with single earner and two children
In France and the Czech Republic, low- and middle-income households with one earner and two children were net transfer recipients and therefore experienced a negative burden (net relief).
The burden exceeded 20% in Finland, Denmark, Lithuania, Slovenia, the Netherlands, and Slovakia.
In this scenario, Denmark, the Netherlands, and Finland had the highest tax burdens for both the middle and upper middle classes.
3. Single-person household
On average, single-person households in the EU pay more tax than all middle-class households.
According to the EconPol forum, this is not surprising for two main reasons. They primarily receive less social benefits than their families due to the absence of family-related remittances, including child benefits.
advertisementFamilies are also more likely to get tax relief through joint spousal assessments and child benefits.
In 2019, the highest tax rates for single-person households were in Denmark, Belgium, Slovenia, and Germany. It was more than 40% for middle- and upper-middle-class households in these four countries.
Cyprus, Romania and Estonia had the lowest tax burden for single-person households.
Two-income households with two children had the lowest tax burden.
Comparing these three assumptions, households with two working children had the lowest tax burden. On average, the EU’s effective tax burden was just 6% for the lower middle class, compared with 17% for the middle class and 24% for the upper middle class.
For single-earner families with two children, these rates were 12%, 23%, and 29%, respectively.
advertisementThe tax burden for single-person households was significantly higher than for family households. The rate was 26% for the lower middle class, 32% for the middle class, and 35% for the upper middle class.
The table below shows all three scenarios for each mid-tier segment, providing a comprehensive comparison across EU member states.
OECD calls for review of tax and benefits system
The OECD report, titled “Under Pressure: A Squeezed Middle Class,” found that in recent decades the cost of some goods and services, such as housing, which are essential to a middle-class lifestyle, has increased It turns out that the economy is rising faster than inflation.
Being middle class once meant the guarantee of living in a comfortable home and providing a lifestyle that would last generations.
“But there are now signs that the foundations of our democracy and economic growth are not as stable as they once were,” the OECD warns.
advertisementA report published in 2019 found that the lower middle class feels that the current socio-economic system is unfair. “This can be addressed by reviewing and adapting tax and benefit systems,” the report says.
