Tax the rich more to help the middle class, says OECD
Higher tax rates for the wealthy could help finance reductions in the tax burden of lower-to-middle-income households, says a new OECD report.
- Middle-income households have experienced dismal income growth over the past three decades, says a new OECD report
- It highlights the problem of bracket creep — where wage inflation pushes people into higher tax brackets
- It also calls for policy changes including income tax cuts, curtailing tax breaks for housing, and fairer wages
The report calls for targeted income tax cuts as a way to boost middle-class disposable incomes and suggests curtailing tax breaks for housing.
The report, Under Pressure: The Squeezed Middle Class, said the “economic centre of gravity is tilting away from the middle”.
Middle-income households had experienced dismal income growth over the past three decades as the costs of housing, education and health care had become too expensive.
They have had little capacity to save, and some are even running up debt in order to maintain their standard of living.
More than one-in-five middle-income households spend more than they earn.
“As a result, today the middle class looks increasingly like a boat in rocky waters,” the report said.
To address the problem, the report calls for other policy changes including getting more women back to work by offering more generous paid parental leave, as well as giving all workers higher wages, including in the form of a “living wage”.
Don’t help the middle and forget the poor
The report comes as both major parties have unveiled their plans for income tax cuts.
The OECD said greater support for the lower-middle should not come at the expense of the most vulnerable in society.
“It will require greater contributions from the better-off,” it said.
Tax reductions for the lower-middle-income group would likely require better-off households — including upper-middle-income households — to make a greater contribution to financing public expenditures, it said.
“Higher marginal tax rates for high-income earners could help finance some of the reductions in the tax burden of lower-middle-income households,” it added.
But it cautioned that “capacity to generate substantial additional tax revenue from high-income earners is limited if one wishes to avoid also increasing the tax burden on the middle”.
The report notes the problem of bracket creep — where wage inflation pushes people into higher tax brackets — but also warns that tax cuts put pressure on limited government budgets.
“Significant tax cuts for middle-income groups would almost certainly lead to substantial shortfalls in public revenue, as middle-income households generate nearly two-thirds of overall direct tax revenue,” it said.
“The funding of social protection systems and public services, of which middle-class households are major beneficiaries, would undoubtedly be affected.”
Median incomes have grown slowly
Median incomes have grown slowly since the global financial crisis.
How much income tax will you save?
Across the OECD, the middle-income class accounts for 61 per cent of the population. In Australia the middle-income class accounts for 58 per cent of the population.
Between 2007 and 2016, median incomes rose by an average of 0.3 per cent per year in 17 OECD countries.
This is less than one-third of the rate in the previous decade and much lower than the 0.8 per cent increase for the top-10 per cent income households.
The report said this dwindling share of income may also result in weaker economic and political influence.
Fewer working-age households are in the middle-income class than three decades ago.
While the share of elderly people in the middle-income class has risen, shares of those from all other age groups have fallen, especially among young people and families with children.
Of those that can work, one-in-six middle-income workers are in occupations that are at high risk of automation.
Traditional middle-class jobs, for example in manufacturing, are disappearing, to be replaced by lower-quality service sector jobs or highly-skilled positions.
“Projections suggest rapid technological change will reduce job quality and earnings stability for middle-income workers, albeit to a lesser extent than among those in low-skilled, low-wage employment,” the report said.
Time to ensure fair wages
The report advocates policy changes including ensuring fair wages.
It noted public debate about the weakening of trade unions over the past few decades was being presented as a contributory factor behind the sluggish wage growth of middle-income households.
“Strengthening collective bargaining has therefore been suggested as one way to support middle-class incomes,” it said.
*It said minimum wages vary substantially from country to country in the OECD. But in some countries businesses pay “living wages”, which are higher than the minimum wage and calculated to cover the cost of living either for a full-time worker or relative to the poverty line.
The report also said there was potential for boosting middle-class incomes by increasing women’s hours worked and earnings.
In 24 of the 34 OECD countries examined, the report said second earners pay a higher average tax rate than single earners at the same earnings level, and the number of countries rises to 32 if there are children in the household.
It noted Australia was among countries that have attempted to narrow the “tax wedge” — the gap between before-and after-tax pay for second earners — by abolishing the Dependent Spouse Tax Offset.
The report also calls for household tasks to be shared more fairly between men and women, and suggests well-designed paid-leave provisions and subsidised childcare can help.
Target housing tax breaks
The report also noted that private pension funds and owner-occupied residential property tended to be the most tax-favoured forms of savings.
“Curtailing capital gains tax exemptions for example, could help increase the returns on smaller savings,” it said.
But it warned that scrapping all distortive tax advantages for residential property would significantly increase the tax burden on middle-class homeowners, since they hold much higher proportions of their total assets in housing than any other income group.
It also noted the lower-middle-income group held relatively significant wealth despite their lower incomes, often because they have inherited their house.
“Inheritance taxes can generate significant revenue and promote equality of opportunity by reducing overall wealth inequality, but must be carefully designed to avoid overburdening the middle class,” the report said.
The middle class account for almost two-thirds of direct tax revenue in most OECD countries.
The report said this meant any policy that aimed to reduce the middle-income group’s tax burden or to extend benefits to them may require a trade-off.
“Substantially reducing the tax burden on middle-income households would likely undermine the funding of some public services that they heavily rely on, or it would require more precise targeting of public expenditures to lower-income groups to reduce overall spending,” it said.