MIDDLE CLASS • TAX FAIRNESS • WORK • ECONOMIC MOBILITY • UNITED STATES • GERMANY
The People in the Middle Keep Paying
The poor get help. The wealthy have assets, options and tax advantages. What happens to the people whose main economic asset is their work?
Seat Affected: Middle-income wage earners in the United States and Germany
Seat Status: Seat Blocked
Date: October 13, 2026
In America and Germany, at kitchen tables and in break rooms, the same complaint gets said out loud, usually by someone looking at a paycheck: I work. I pay taxes. I pay social contributions. I earn too much for assistance and too little to feel secure. Who is this system built for?
It is easy to dismiss that frustration as selfishness. It is just as easy to point the frustration toward people who receive government assistance. Both responses miss the bigger problem.
Researchers have been documenting pressure on middle-income households for years. The OECD found that the share of people living in middle-income households across member countries fell from about 64% in the mid-1980s to 61% by the mid-2010s. Middle incomes grew more slowly than incomes at the top, while major costs such as housing increased faster than household incomes. More than one in five middle-income households were spending more than they earned.
That does not mean every middle-class family is struggling or that every tax is unfair. It does mean there is a legitimate question about whether people trying to move upward through work are carrying too much of the load.
Two Different Kinds of Help
When public debate turns to lower-income households, assistance is easy to see. Food assistance. Housing help. Medicaid. Child benefits. Subsidized healthcare. In Germany, Grundsicherungsgeld, which replaced Bürgergeld on July 1, 2026.
Government spends money or provides a service, so everybody can see it. Help delivered through the tax code is less obvious.
Economists call many of these provisions tax expenditures. They include deductions, exclusions, credits and preferential rates that reduce the amount of tax government would otherwise collect.
The Congressional Budget Office estimated that the major individual income and payroll tax expenditures it examined were worth about $1.2 trillion in 2019, or 5.8% of GDP. These provisions did not all benefit wealthy people. Many benefited ordinary households through retirement plans, health insurance, tax credits and other policies. Measured relative to household income, the lowest-income fifth actually received the largest benefit.
But some individual tax advantages were heavily concentrated at the top. CBO found that 95% of the benefit from preferential tax rates on long-term capital gains and dividends went to households in the highest-income fifth in 2019. Seventy-five percent went to the top 1%.
That does not mean a lower capital-gains rate is the same thing as Medicaid or food assistance. Economists disagree over how tax expenditures should be defined and whether every preferential rate should be described as a subsidy.
The narrower point is simpler. Government affects household resources both through what it spends and through what it chooses to tax, when it taxes it and at what rate. Public debate tends to notice the first more easily than the second.
Germany: A Heavy Burden on Work
Germany makes the pressure on labor especially easy to see. For a single worker without children earning the average wage, the OECD calculated a 49.3% tax wedge in 2025, compared with an OECD average of 35.1%. Only Belgium was higher at 52.5%.
That number is not the percentage disappearing from an employee's gross paycheck. The tax wedge includes both employee and employer social-security contributions as well as income tax. Those contributions also finance real protections: healthcare, pensions, unemployment insurance and other parts of the German social system.
But the number still tells us something important: Germany finances a very large part of its system through work.
The OECD's 2025 Economic Survey of Germany says the German tax mix is heavily tilted toward labor. Revenue from property, capital gains and inheritance taxes is comparatively low, while effective taxes on labor are high enough to reduce incentives to work more. The OECD explicitly recommends lowering personal income taxes while raising revenue elsewhere, including through property taxation and by reducing some tax advantages involving capital income and inheritances.
The ifo Institute has reached a related conclusion about Germany's middle class. Its research finds that households below the middle class are generally net recipients from the tax-and-transfer system, while households become net contributors from the middle class upward. Around middle incomes, the combination of taxes, social contributions and the withdrawal of transfers can mean that only about half of an additional euro earned remains with the household.
That is the part people feel. You take overtime. You get a raise. You accept more responsibility. You earn another euro. But the difference between what you earned and how much better off you actually became can be surprisingly large.
That creates a legitimate policy question: If government wants people to work more, build savings and become more economically independent, how much of the next euro should they actually get to keep?
America Has a Different Version of the Problem
The United States places a substantially lower overall tax burden on labor than Germany. But America creates another problem through the way some means-tested benefits disappear as income rises.
SNAP can decline. Healthcare assistance can change. Childcare subsidies can fall. Housing assistance can disappear. Tax credits can phase out. Each program may make sense on its own. But families live under all of the programs at the same time.
When several benefits decline over the same income range, earning an additional dollar does not necessarily mean the household becomes a dollar better off. Economists describe this using the effective marginal tax rate: how much of the next dollar earned is effectively lost through additional taxes and reduced benefits.
That can produce what are commonly called benefit cliffs.
The problem is not that families should receive benefits forever regardless of income. Benefits aimed at households in need obviously have to end somewhere. The problem arises when the systems are poorly coordinated.
If earning more causes several supports to disappear at once, government can unintentionally make economic advancement less rewarding. A program intended to help someone become independent should not create a financial wall exactly where that person is trying to climb out.
The Poor Are Not the Reason the Middle Is Stuck
This is where the conversation often goes wrong. A middle-income worker sees someone receiving assistance and thinks: I'm working and paying for that.
Taxes do finance public assistance. That part is true. But taking healthcare or food assistance away from a struggling family does not automatically make the middle-income worker better off. The worker's tax bill does not necessarily fall by the amount that family lost.
And more importantly, it does nothing about the larger question: Why is so much of the system financed through labor in the first place?
People receiving assistance are often the most visible beneficiaries because their benefits come in recognizable forms. Meanwhile, many advantages higher up the income ladder appear inside the tax code, investment rules or ownership structures. That makes them less visible.
It also makes it dangerous to turn the middle-class squeeze into a fight between people who work and people who are poor. Many people receiving assistance do work. Many middle-income workers will themselves need unemployment insurance, healthcare, disability assistance, pensions or family support at another point in life.
A functioning social system needs a floor. The question is whether it also provides a workable staircase.
What Happens at the Other End?
A wage earner has relatively little control over when salary becomes taxable. You work. You are paid. The income is reported. Taxes follow.
Capital can operate differently. Investment gains are generally taxed when they are realized, meaning when an asset is sold or otherwise disposed of, rather than every year simply because the asset has become more valuable. Long-term capital gains can also receive preferential tax rates.
That means someone who already owns substantial assets may have something the wage earner generally does not: time and control over the taxable event.
Time matters because assets can continue compounding before a gain is realized.
The distinction becomes even more important at death. In the United States, increases in the value of assets transferred at death can escape capital-gains taxation because the heir generally receives a new tax basis based on the property's market value.
CBO estimated that this exclusion of capital gains transferred at death cost about $39 billion in 2019. Fifty-six percent of the benefit went to the highest-income fifth of households, including 18% to the top 1%.
Again, this does not mean investment should be punished. Businesses need capital. Retirement savers need investment returns. Entrepreneurs need investors. And higher taxes on capital can have economic consequences.
But those facts do not eliminate the underlying question: If labor is supposed to be the path by which ordinary people become financially secure, should the tax system make the process of earning capital relatively expensive while allowing existing capital greater opportunities to compound?
That question deserves more attention than the usual argument over whether rich people or poor people are taking too much.
There Are Actual Ways to Change This
This is not a problem without possible solutions. Researchers have modeled reforms that would reduce the burden on work while maintaining the revenue necessary to operate government.
For Germany, researchers at the European Commission's Joint Research Centre examined what would happen if some taxation were shifted from labor toward inheritances and gifts.
They modeled several revenue-neutral scenarios. One scenario kept Germany's progressive inheritance-tax rates but eliminated broad exemptions for business assets. The researchers estimated that this could generate roughly €9 billion to €12 billion per year, with the additional revenue used to reduce taxation on labor. Their simulation found a small positive effect on labor supply, particularly among lower-income workers.
Another EUROMOD study examined shifting part of Germany's tax burden from labor to property by taxing property using market values instead of older valuation methods. Its simulation reduced the implicit tax rate on labor from 37.2% to 36.5%. The change was not revolutionary, but it showed that the burden can be shifted rather than simply increased.
The OECD now recommends the same general direction for Germany: lower taxes on labor while broadening other tax bases, including property, capital income and inheritance, together with stronger tax enforcement.
That gives us a starting point. Not a perfect solution. A direction.
A Better Deal for Work
A serious reform agenda could begin with one principle: Working more should normally leave a household meaningfully better off.
That could mean reducing income-tax and social-contribution burdens on lower- and middle-income workers, particularly where effective marginal rates become unusually high.
It could mean coordinating benefit phaseouts so that households do not suddenly lose several forms of assistance because of one raise.
It could mean broadening tax bases elsewhere rather than simply increasing already-heavy taxes on labor.
It could mean examining preferential treatment of large inheritances, capital income and certain property arrangements while protecting ordinary homeowners, retirement savers and genuinely productive business investment.
It could also mean something much less glamorous but extremely important: make the math understandable.
A worker should be able to ask: If I earn another €1,000 or $1,000 this year, how much better off will my household actually be?
Government should be able to answer. Not merely the income-tax office. Not merely the Jobcenter. Not merely the Medicaid office. Not merely the housing authority. The entire system.
Because people do not experience government one program at a time. They experience the combined result.
Who Is Missing?
The missing person in this debate is not simply “the middle class.” It is the person whose primary economic asset is work.
The person who gets up, goes to work, accepts overtime, takes the promotion and tries to save.
The person who earns too much for substantial assistance but does not own enough capital for tax deferral, investment structures or inheritance planning to change their economic life.
That person is not poor. That person is not wealthy. And that person may be doing exactly what society says people are supposed to do while wondering why moving forward feels so slow.
The answer should not be to make poor people poorer. It should not be to assume every wealthy person is doing something wrong.
The challenge is to build a system in which the floor remains strong and the staircase still works.
Because protecting people from poverty is important. Allowing people to build wealth is important. But if people who work their way from one toward the other keep finding another toll booth on every step upward, something needs to change.
The question for America and Germany is therefore not simply: Who pays the most tax?
It is: After taxes, contributions, lost benefits and the cost of living, who actually gets to move forward?
That is the receipt that matters.
Pull Up A Chair
If you are considering overtime, a promotion or additional work, calculate what the additional income actually does to your household finances.
In the United States, check not only federal and state taxes but also whether income changes affect SNAP, Medicaid or CHIP, childcare assistance, housing benefits or refundable tax credits.
In Germany, check income tax and social contributions together with possible changes to Wohngeld, Kinderzuschlag and Grundsicherungsgeld.
Then ask your representative one concrete question:
At my income level, how much of my next €1,000 or $1,000 does my household actually keep after taxes, contributions and lost benefits, and what are you doing to improve that number without taking essential protections away from people below me?
That is harder to answer with a slogan.
Receipts
1. OECD, Under Pressure: The Squeezed Middle Class.
Middle-income trends, costs and household financial pressure.
2. OECD, Taxing Wages 2026.
Comparative tax wedges on labor, including Germany.
3. OECD, Economic Survey of Germany 2025.
Recommendations on labor taxation, property, capital income and inheritance.
4. Congressional Budget Office, The Distribution of Major Tax Expenditures in 2019.
Distribution of tax expenditures, preferential capital-gains and dividend rates, and capital gains transferred at death.
5. ifo Institute, Germany's Middle Class.
Research on Germany's middle class, taxes, contributions and transfers.
6. European Commission Joint Research Centre.
Simulation of shifting the tax burden from labor toward inheritances and gifts in Germany.
7. EUROMOD / JRC.
Simulation of a revenue-neutral shift from labor taxation toward property taxation.
8. Bundesagentur für Arbeit.
Grundsicherungsgeld replacing Bürgergeld from July 1, 2026.
Resources
United States: Congressional Budget Office for distributional research; Tax Policy Center for marginal-rate and tax-expenditure explainers; IRS Volunteer Income Tax Assistance for qualifying taxpayers.
Germany: Bundesagentur für Arbeit and Jobcenter for Grundsicherungsgeld; Familienkasse for Kinderzuschlag; local Wohngeld offices; Lohnsteuerhilfevereine for eligible taxpayers; ifo Institute research on the middle class.
International: OECD Taxing Wages, Economic Surveys and middle-class research.
Seat Summary
Seat Affected: Middle-income wage earners in the United States and Germany.
Who Is Missing: The person whose principal economic asset is work: earning too much for substantial assistance, possessing too little capital for wealth-based tax advantages to matter, and rarely centered when politicians debate either welfare or wealth.
What Needs Attention: Effective marginal tax rates, benefit cliffs, the relative taxation of labor and capital, inheritance and property-tax preferences, and whether additional work reliably produces additional disposable income.
Who is missing? Ally = Action. Take Your Seat. 🪑