A single tax scale for everyone – but what will the impact be on individual families? By replacing the current tax bands with a system of individual taxation, the government aims to make the tax system independent of marital status. The reform, spearheaded by the minister for finance Gilles Roth (CSV), thus adapts taxation to changing patterns of cohabitation and strengthens the fiscal autonomy of spouses. However, the outcome will depend on each person’s income, how it is shared within the couple, and their family commitments.

A research paper by the Scientific Unit of the parliament, published on 29 July at the request of Sam Tanson (déi Gréng) and included on the agenda of the Finance Committee meeting on 15 September, sheds light on these trade-offs. Its analysis of 23 European countries, 15 of which already practise individual taxation without the option of joint tax returns, supports the government’s general approach. However, it also shows that this move towards individual taxation must be accompanied by mechanisms that take family circumstances into account.

In the Unit’s view, the government will have to demonstrate that the outcome is fair. Two taxpayers on the same income may have very different financial capacities depending on whether they live alone, are bringing up a child, or are supporting a dependent spouse. Abolishing the tax brackets does not eliminate these differences. The study highlights the need for further simulations to assess the effects of the reform according to different family circumstances.

A change that benefits dual-income couples

Single people currently taxed in class 1 will benefit from a new, more favourable tax scale. Couples with relatively equal incomes are also among the potential beneficiaries. According to the note, the new tax scale becomes more favourable than the current class 2 where the second earner accounts for at least around 25% of the couple’s total income. However, the overall outcome also depends on deductions and allowances.

Conversely, couples where only one partner works, or where there is a significant imbalance in income, are more vulnerable. Joint taxation currently offers them an advantage thanks to ‘splitting’: the couple’s income is fictitiously divided equally between the spouses for tax calculation purposes, which mitigates the progressive nature of the tax scale. This advantage is particularly pronounced when only one spouse has an income.

Its abolition therefore alters the tax balance for these households. However, as the note points out, the bill does not provide for a general mechanism to offset these effects. Ad hoc solutions do exist. Under certain conditions, the portion of the early-childhood tax allowance corresponding to the spouse with little or no income may be allocated to the spouse with taxable income. However, this measure, which is linked to the presence of a young child, does not cover all single-income couples.

Behind this tax mechanism, therefore, lies a political choice. Individualisation reduces the advantage associated with significant income inequality. At the same time, it raises the question of how to treat periods without paid employment: a career break to bring up children, care for a relative or cope with illness is not always a matter of freely choosing between work and inactivity.

The study does not quantify the impact on each of these groups. It does, however, show why presenting the reform in terms of broad income brackets is not enough: the distribution of income within a couple also matters.

Twenty-five years of coexistence

However, not all single-income households will be immediately affected by the end of tax splitting. To ease the transition, the government plans to allow couples who were in a relationship before 1 January 2028 to continue filing a joint tax return for 25 years, subject to certain conditions. They will be able to opt for the new scheme, but this choice will be irrevocable.

This protection takes into account decisions made under the current rules. A household that has organised its working life around a single income cannot necessarily adjust this balance when the tax system changes.

However, this compromise comes at a price: the long-term coexistence of different tax regimes. Couples with the same income and the same expenses may be taxed differently depending on when they formed their partnership. New single-income couples will therefore not benefit from the advantage that comparable households will be able to retain during the transition period.

The report highlights the exceptionally long duration of this period when compared with the rest of Europe. The government is protecting existing arrangements, but is postponing the widespread implementation of the model it presents as more neutral. The promise of simplification will also have to take account of this coexistence.

Single parents: the fairness test

For single-parent families, the picture is less clear-cut. Their tax relief currently rests on two distinct elements: the class 1a tax scale and the single-parent tax credit. The reform abolishes this tax bracket whilst providing for an increase in the maximum amount of the credit from €3,504 to €4,008.

It would therefore be premature to conclude that single parents will be worse off. The new tax scale and the increased tax credit must be considered together. The study specifically highlights the need for simulations covering different income profiles in order to assess their combined effect, whilst not providing these calculations itself.

This assessment requirement also applies to child-related benefits. A deduction from taxable income, a tax reduction and a direct payment do not have the same effect. A tax benefit may provide little support to a household that already pays little tax.

However, the note makes an important distinction: for the majority of children, the tax relief of €922.50 is included in child benefit, regardless of the parents’ tax situation. The issue with the non-refundable tax relief concerns a residual group of children who do not receive these allowances. This is therefore a persistent limitation of the scheme, requiring a targeted response, rather than a new loss for all low-income families.

Equity is measured in terms of disposable income

To assess the outcome of the reform, we must look beyond the tax amount alone. Individualised taxation does not automatically alter the rules governing social security. The Revis is still calculated on the basis of the household’s resources: a taxpayer may therefore be taxed individually whilst their social security entitlements remain dependent on their spouse’s income. This coexistence is common in the countries studied. It nevertheless requires that taxes and benefits be considered together in order to assess the impact on living standards or the financial gain associated with returning to work.

The tax measures are, in fact, part of the ‘Mateneen. Fir all Famill. Fir all Kand’ package unveiled on 6 January. A package combining tax and social measures relating in particular to childcare and family benefits. It is the combined effect of these measures that will enable us to assess the actual situation of households.

Nevertheless, a dividing line is emerging: single people and couples with relatively equal incomes stand to benefit from the new tax scale. The abolition of tax splitting leaves single-income households more vulnerable, whilst protecting those who can continue to be taxed jointly for 25 years. For single parents, the overall impact remains to be seen.

The government will therefore have to defend not only the differences in treatment that its reform abolishes, but also those that it will retain for a quarter of a century. Its fairness will be measured in terms of households’ disposable income, rather than simply by the uniformity of the tax scale.