The middle income class bears the largest share of the tax burden

NPO Radio 1

Our tax systems is a nontransparent collection of rules, exceptions, tax credits and allowances. As a result, it is difficult to predict how much your financial situation will improve after a wage increase. In an interview with NPO Radio 1, Peter Kavelaars, Professor Fiscale Economie at Erasmus School of Economics, says that this is not a new phenomenon. 

Within our current tax system, workers that belong to the middle income class (gross earnings between the 30.000 and 50.000 euros) benefit the least from a wage increase and are affected the most by changes in our tax system. As a result, form every euro (gross) they earn extra, more than 50 cents does not end up in their wallets. When a wage increase has the consequence that you lose your rent subsidy, for example, it could even be the case that you have net less money to spend. This is because you have to pay more taxes when you earn on the one hand, and, on the other hand, you will be less entitled to tax allowances. 

This is not a new phenomenon, according to Professor Kavelaars, but is already the case for forty years.  Nevertheless, the marginal tax burden has become higher, says Professor Kavelaars. This is because the general tax credit and labour tax credit used to be a nominal fixed amount, but have decreased over the past few years. Furthermore, these tax credits become lower when you earn more.

So how can we help the middle income class? According to Professor Kavelaars, we first need to decide what we exactly want to accomplish. A high marginal tax burden is unfavourable for the economy. However, the number of taxpayers that suffer from this is not very large: it are mostly the workers who are facing the decision whether they want to work 10 hours per week more. On the other hand, it does not have an effect on beneficiaries who face the decision whether they want to enter the labour force or not. So the question whether we want to do something about this high marginal tax burden is a social issue. Of course, we want to help the middle income class. But when we do that, an other group has to bear the burden. 

 

 

 

Professor
More information

Listen to the entire interview (in Dutch) on NPO Radio 1, d.d. 8 August 2019