The tax burden on the middle class differs across the EU, as well as across the different income segments.
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The UK middle classes continue to face economic struggles despite earning up to £60,000 annually (€70,180), according to a recent report.
In many OECD countries, the middle classes have seen their ability to save decline, and in some cases have fallen into debt, as the tax burden on the European middle class becomes increasingly controversial in the present cost of living crisis.
The middle class's income and tax burdens differ significantly across European countries. In general, lower-middle incomes are taxed less, while upper-middle ones are taxed the most.
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The size of households and the number of earners also have an impact on tax rates.
Euronews Business looks at the tax burden of the middle class, based on a dataset from the economics journal EconPol Forum, to find out where in Europe the middle class has the highest purchasing power, and where the middle class pays the highest and lowest taxes.
Who is the middle class?
Before looking at the data, it's important to look at the definition of a few key terms.
According to the OECD definition, the middle class refers to households with an income between 75% and 200% of the median national income. It is divided into three sub-categories:
- Lower middle class: Income between 75% and 100% of the median national income
- Middle 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 for spending and saving after taxes and transfers. A household's size and the ages of its members are taken into account for weighting households to better compare them.
In which country does the middle class have the highest disposable income?
In 2019, the middle class in Luxembourg had the highest disposable income, standing between €30,618 and €81,649, according to EconPol based on the EU Statistics on Income and Living Conditions survey.
On the flip side, Bulgaria had the lowest average household income among European countries. Here, the disposable income of the middle class varied from €2,908 to €7,755.
The chart above shows the huge differences in disposable income across EU member states and the UK in nominal terms.
Looking at household disposable income in purchasing power standard (PPS), the level of differences compared to nominal terms decreased, but there are still wide disparities.
Disposable income in PPS provides a fairer comparison as the cost of living largely varies across Europe. That means households can consume a different amount of goods and services in different countries with the same income.
In 2019, the middle class in Luxembourg recorded the highest purchasing power in 2019: about twice as high as the EU average.
The middle classes in Austria and Germany also enjoyed purchasing power that was about 40% higher than the EU average. France, Ireland, Italy, and the UK had a 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.
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What is the effective tax burden?
The effective tax burden of middle-class households includes income taxes, statutory social security contributions, and social transfers received.
Based on calculations by Mathias Dolls, Florian Dorn, David Gstrein and Max Lay from the Munich-based ifo Institute, Euronews Business looks at three different scenarios.
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1. Families with dual earners and two children
Lower-middle-income families with two equal incomes (dual earners) 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 that 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 classes having an average of 29% and 22%, the middle group 34% and 30%, and the upper middle classes 37% and 35%, respectively.
Belgium’s case is remarkable as the tax burden varied substantially across the middle-class segments.
While families in the upper middle class had to pay one of the highest tax rates (over 33%), this was less than 20% in the middle group and -14% for the lower middle class.
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2. Families with a single earner and two children
Lower middle-income families with a single earner and two children in France and Czechia were net transfer recipients and thus experienced a negative burden (net relief).
The burden was more than 20% in Finland, Denmark, Lithuania, Slovenia, the Netherlands and Slovakia.
Denmark, the Netherlands and Finland had the highest tax burden in both the middle and upper middle classes in this scenario.
3. Single households
On average, single households in the EU pay more tax than families across every middle-class segment.
This is not surprising for mainly two reasons, according to EconPol Forum: They principally receive fewer social benefits than families because of the absence of such family-related transfer payments including child benefits.
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Families have also more potential for taxation relief through joint spousal assessment and child allowances.
In 2019, single 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 households.
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Dual-earner families with two children had the least tax burden
When we compare these three assumptions, dual-earner families with two children had the least tax burden. On average, the effective tax burden in the EU was just 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-earner family with two children, these rates were 12%, 23% and 29% respectively.
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The tax burden was considerably higher for single households than for families. It was 26% in the lower middle class, 32% in the middle and 35% in the upper middle class.
At the country level, the middle class in Denmark, Belgium, Germany, Finland, Lithuania, Slovenia, and the Netherlands was taxed the most. The average tax burden of the middle classes in Romania, Cyprus, Bulgaria, Estonia, Portugal, Spain, and Greece was lower than the EU average
The table below demonstrates all three scenarios for each middle-class segment, providing a comprehensive comparison across EU members.
OECD urges overhauls to the tax and benefit system
A report by the OECD entitled “Under Pressure: The Squeezed Middle Class” found that the costs of some goods and services such as housing, which are essential for a middle-class lifestyle, have risen faster than earnings and overall inflation in recent decades.
The middle class used to mean the assurance of living in a comfortable house and affording a rewarding lifestyle for many generations.
“However, there are now signs that this bedrock of our democracies and economic growth is not as stable as in the past,” the OECD warns.
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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 reviewing and adapting the tax and benefit system,” the report said.
