Analysis of how inflation and tax reforms affect low‑ and middle‑income earners
Taxpayers earning between 15,000 and 20,000 euros per year are among the groups most challenged by rising prices and recent personal income tax reforms. A notable leap in the tax burden for the portion earned above 15,000 euros means a large share of every extra euro goes toward income tax. A study conducted for the tax board and the treasury inspectorate explains that real purchasing power falls as prices climb. The proposed solution involves deducting a portion of the difference between income withholding and the amounts owed to each taxpayer.
At these income levels, the study notes that some taxpayers do not owe taxes given equal income, while others owe tax when more than one payer is involved. Without an adjustment to the tax rate, the inflation impact would have cost taxpayers about 9,000 million euros in personal income tax, even though fully aligning the system with rising prices would be prohibitively expensive.
The report highlights concerns about incomes when multiple payers are involved, a situation that affects roughly 1.4 million taxpayers in 2020. For example, a single taxpayer earning 15,000 euros who has no withholding typically would not need to file a tax return (the filing threshold for a single taxpayer starts at 22,000 euros). In such cases, the final tax bill would be zero. However, if there are two payers and both have paid more than 1,500 euros, a declaration must be filed, and failing to do so could result in a payment of 387.22 euros.
The study explains a flaw in the tax progression system. The marginal rate jumps from 0% to 15,000 euros before a sharp increase to 43% at lower income levels, then falls again at middle income ranges. For instance, when a taxpayer with a 15,000 euro base income receives a 1,500 euro raise (a 10% increase), the additional tax at the marginal rate of 43% would amount to 645 euros under the current framework. In contrast, someone earning 26,000 euros with a 10% raise faces a marginal rate around 30% on the extra income.
In an inflationary environment, many of these taxpayers seldom see real purchasing power grow because most increments are eroded by high marginal rates. With a 10% salary rise from 15,000 euros and last year’s average inflation of 8.4%, moving to 15,855 euros does not restore purchasing power to the level needed to reach 16,260 euros, a point confirmed by the researchers.
In September, the government announced an increase in the minimum income tax exemption from 14,000 euros to 15,000 euros per year. The most recent reforms to personal income tax, introduced in 2022 and activated in 2023, followed an earlier reform from 2018 aimed at reducing the tax burden for the lowest income groups. Both reforms created two separate rates for those who must file and those who do not. While generally beneficial, these changes create distortions and perceived unfairness in the personal income tax structure. The universal declaration eliminates some steps in census-taking, and those benefiting from a minimum vital income would find it easier to be counted. This also means that lower‑middle income earners may face higher brackets due to adjustments in the income tax bands. In the current inflationary context, real purchasing power cannot be assumed to rise in parallel with nominal earnings.
The study cautions that the real economic capacity of families declines with inflation while effective withholding rates on pensions and wages rise, signaling higher final rates for many taxpayers. Personal income tax collection, already exceeding 80,000 million euros in 2021, reached a historical peak and continued to grow into 2022. The researchers argue that while some political voices call for inflation‑adjusted reform of the entire personal income tax, such a move would incur substantial costs. A 9,000 million euro revenue gap, if unaddressed, would exceed the current deficit by nearly a full percentage point of GDP. The expected consequence, if the system remains partially unadjusted, is greater household spending power feeding back into inflation. The analysis notes that wage growth between 2% and 2.5% aligns with the broader adaptation observed across the economy.
Overall, the findings stress the delicate balance between adjusting tax policy for inflation and maintaining fiscal stability. They suggest that targeted adjustments to withholding and tax bands, alongside clear simplifications for multi‑payer scenarios, could improve fairness without triggering unintended inflationary dynamics. The report emphasizes that any reform should consider real purchasing power and the evolving income structure, especially for households near the 15,000 euro threshold and for those with multiple sources of income.