Income and Tax Burden of the Middle Class in Europe
INSTITUTIONS ACROSS THE WORLD
Key Messages
- Middle class incomes in the EU are highest in Luxembourg, Denmark, Finland, Austria, and Sweden, and lowest in Eastern European countries. The middle class in Bulgaria and Romania are at the bottom of EU nominal incomes, but their living costs are just half of the EU average
- When accounting for differences in purchasing power in the EU, the middle class in Luxembourg, Austria, Germany, and Finland can buy the most with their income. The purchasing power of the middle class in Eastern Europe is the lowest, but inequality in incomes of the middle class in different EU member states is less pronounced when cost of living is considered
- The tax burden of the EU middle classes differs depending on the household’s country of residence. The effective tax rates follow a progression in all countries. Lower-middle incomes are taxed less, while upper-middle ones are taxed the most
- Families are generally less burdened by the tax and transfer system than singles with the same gross incomes. However, countries differ in whether families with single-earner households are more likely to enjoy tax advantages, or families with equal earners
- In general, the middle class in Denmark, Belgium, Germany, Finland, Lithuania, Slovenia, and the Netherlands is taxed the most. Among others, France, Poland, Italy, Luxembourg, Sweden, and Austria, impose average tax burdens on their middle classes. The middle classes in Spain, Greece, Estonia, Portugal, Cyprus, Bulgaria, and Romania all rank below the average tax burden in the EU
A strong middle class is important for political stability in democracies and can be an anchor against political extremism . With their consumption and labor input, middle class households make a significant contribution to economic growth and a prosperous society. With their taxes and other levies, the middle-income groups also contribute significantly to revenues and thus to the government budgets and the financing of EU welfare states. At the same time, the middle class has come under pressure in many countries in recent years. In many European countries, it is therefore questionable whether and to what extent the middle class will be able to bear further fiscal and financial burdens during the current crises and to meet the state’s additional financing needs to cope with major challenges such as climate change, the energy transition, the security policy shift, or demographic change.
Mathias Dolls, Florian Dorn, David Gstrein and Max Lay: “Income and Tax Burden of the Middle Class in Europe,” EconPol Forum 24 (4), CESifo, Munich, 2023.