Higher tax rates for the wealthy could help finance reductions in the tax burden of lower-to-middle-income households, according to OECD.
The OECD report Under Pressure: The Squeezed Middle Class reveals that the middle class has shrunk in most OECD countries as the "economic centre of gravity is tilting away from the middle". While almost 70% of baby boomers were part of middle-income households in their twenties, only 60% of millennials are today, with the middle class defined as earning between 75% and 200% of the median national income.
"Today the middle class looks increasingly like a boat in rocky waters. Governments must listen to people's concerns and protect and promote middle class living standards. This will help drive inclusive and sustainable growth and create a more cohesive and stable social fabric," OECD secretary-general Angel Gurría said.
Today the middle class looks increasingly like a boat in rocky waters"
The report found the cost of a middle-class lifestyle has increased faster than inflation. Housing, for example, makes up the largest single spending item for middle-income households, at around one third of disposable income, up from a quarter in the 1990s. House prices have been growing three times faster than household median income over the last two decades.
The report calls for targeted income tax cuts as a way to boost middle-class disposable incomes and suggests curtailing tax breaks for housing.
However, 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.
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 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."