What is the tax wedge? What Spain's middle class pays to work

The tax wedge is the gap between what a job costs an employer and what the worker takes home. It adds up three things: the social security contributions the employer pays on top of the gross wage, the contributions deducted from the worker's pay, and income tax. The OECD measures it every year in its Taxing Wages series, and it is the clearest number behind one of the problems Miriam González raised at the launch of Democracia 21: the party wants to ease the tax burden on a squeezed middle class, as we noted in our overview of its proposals. This explainer puts figures on that squeeze, from the standpoint of radical centrism, which takes both the welfare state and the cost of working seriously.

The numbers for an average Spanish wage

Take a single worker without children on Spain's average wage in 2025, which the OECD puts at €32,678 gross a year. To employ that person, the firm pays €42,668: the gross wage plus €9,990 of employer social security contributions. Out of the gross wage come €2,118 of employee contributions and €5,576 of income tax, split almost evenly between the central and regional parts of IRPF. The worker keeps €24,985.

The wedge is the difference, 41.4% of labour cost. Of every €100 the employer spends, about €59 reaches the worker's account. Employer contributions are the biggest slice at 23.4 points, income tax is 13.1 and the worker's own contributions 5.0.

The OECD average for the same worker is 35.1%. Spain ranked tenth of 38 member countries in 2025, up from twelfth in 2024, when its wedge was 41.1% against an OECD average of 34.9%. The climb has been steady: 39.8% in 2019, and a rise every year since 2020.

Europe's big economies sit higher still. Germany's wedge was 49.3% in 2025, France's 47.2% and Italy's 45.8%. Portugal, at 39.3%, is lower, and it cut its wedge in 2024 while Spain's kept rising. The average for the 22 EU countries in the OECD is 41.7%, so Spain has now reached the European norm, coming up from below.

What makes Spain unusual is where the wedge sits. Employer contributions equal 30.6% of the gross wage, against an OECD average of 16.6%. The worker's own contributions are low, 6.5% of gross against 9.6%. So the part of the wedge a worker actually sees on the payslip, income tax plus employee contributions, comes to 23.5% of gross pay, a little below the OECD average of 25.1%. Most of the Spanish wedge is paid before the wage even appears.

At the margin it bites harder. For the same average worker, the marginal wedge in 2025 was 49.7%: of an extra €100 the firm spends on a raise, about half goes to the state. At 167% of the average wage the average wedge is 46.2%, and at 67% it is 37.9%.

Families get little relief. For a one-earner married couple with two children on the average wage, the Spanish wedge was 36.8% in 2025, against an OECD average of 26.2%. That gap of more than ten points is wider than the one for single workers, and only six OECD countries took a bigger share from that family. Portugal took 27.5%, Italy 34.3%, Germany 34.9% and France 39.1%. In Spain the figure was 34.2% in 2019.

The silent rise

Part of that climb was never voted on. Spain's IRPF brackets and allowances are fixed in euros and are not updated automatically with prices. When wages rise with inflation, more income falls into higher brackets and the average rate climbs, even when real pay stays flat. Economists call this fiscal drag; in Spain it is known as progresividad en frío.

Sofía Balladares and Esteban García-Miralles, of the University of Barcelona and the Banco de España, measured it with Spanish tax records in a 2025 IEB working paper. Had the tax parameters been fully indexed from 2019, IRPF revenue in 2023 would have been about €10.6 billion lower, roughly a third of the growth in the tax over those four years. The average effective rate rose from 12.8% to 14.4%, and about 1.3 points of that rise came from the missing indexation. The adjustments governments did make offset only around 30% of the drag. The authors point out that Spain has no systematic indexation, so effective rates rise in a way that is opaque and that nobody designed. An earlier Banco de España paper by the same authors found that the growth of IRPF explains about half of the rise in Spain's public revenue as a share of GDP between 2019 and 2023.

F. A. Hayek described this mechanism in The Constitution of Liberty (1960). As Eugene Miller's account of the book for the Institute of Economic Affairs sets out, Hayek held that a just tax follows a general rule that applies to everyone, and that the majority which decides how much tax is raised should bear it too. He warned that inflation gradually pulls the middle classes into higher rates without any rise in their real income, and noted that in Britain the services voters demanded were paid for mainly by the middle and upper ranges of the middle class. Hayek preferred proportional taxation, an argument our explainer on the book covers. His point about rules holds whatever you think of progressivity: a tax rise should be decided in the open.

Where a radical-centre answer starts

The wedge pays for things Spaniards value. Contributions fund pensions, sick pay and unemployment benefit; income tax pays for schools and hospitals. The left is right to insist on that, and anyone who wants a smaller wedge has to say which revenue replaces it or which spending goes, with the social floor protected.

The liberal market tradition is right too. A wedge of 41% on the average job, and close to 50% on a raise, makes every hire dearer and every extra hour less worth working. It weighs most where Spain most needs more jobs and more hours: young people, second earners, a small firm deciding whether to take on its tenth worker. And Hayek's test applies. Tax should be general, known in advance and stable in real terms.

The idea that belongs to neither camp is to make the wedge visible and its rises deliberate. Every Spanish payslip should show the full labour cost: gross wage, employer contributions, employee contributions, income tax and net pay, so that the worker on €32,678 sees that the job costs €42,668 and knows what those contributions buy. And IRPF brackets, allowances and credits should be indexed to inflation every year by law, so that fiscal drag happens only when the Cortes vote for it and say so. The left keeps its revenue whenever it wins that vote; the middle class stops paying increases nobody chose.

The visible payslip costs almost nothing, and it changes every wage negotiation, because both sides can see how much of a raise the state takes. Indexation has a fiscal price, of the order of the drag figures above, and that price should be met openly. That is the job of a funded IRPF reform, which we set out in a separate proposal.