Tax policy analysis

Taxing Wages: tax burden on labour income in 2013 and recent trends

 

A. The tax wedge overview for an average single worker in the OECD in 2013

The tax wedge between total labour costs to the employer and the corresponding net take-home pay for the average single workers without children in OECD countries varied between Belgium (56%) and Chile (7%) in 2013. The tax wedge was around 50% in Germany (49.3%), Austria (49.1%), Hungary (49.0%) and France (48.9%), and under 20% in Mexico (19.2%) and New Zealand (16.9%). The OECD average tax wedge was 35.9% of total labour cost in 2013 (Tax Wedge 2013)

Tax wedge components as a % of labour costs1,2 in 2013

‌‌Tax wedge chart for 2013
1. Single individual without children at the income level of the average worker.
2. Includes payroll taxes where applicable.

Sources: country submissions, OECD Economic Outlook Volume 2013 (No. 94).

The percentage of labour costs paid in income tax varies considerably within OECD countries.  The lowest figures are in Chile (zero) and Korea (4.6%).  The highest values are in Denmark (35.8%), with Australia, Belgium and Iceland all over 20%.  


The percentage of labour costs paid in employee social security contributions also varies widely ranging from zero in Australia and New Zealand to 17.1% in Germany and 19% in Slovenia. 


Employers in France pay 28.7% of total labour costs in social security contributions, the highest amongst OECD countries.  The corresponding figures are also more than 20% in ten other countries - Austria, Belgium, the Czech Republic, Estonia, Greece, Hungary, Italy, the Slovak Republic, Spain and Sweden.


As a percentage of labour costs, the total of employee and employer social security contributions exceeds 20% in more than half of the OECD countries. It also exceeds one-third of total labour costs in eight OECD countries: Austria, Belgium, the Czech Republic, France, Germany, Greece, Hungary and the Slovak Republic.

B. Employer social security contributions as the main contributors to the tax wedge increase in 2013

The OECD average tax wedge increased from 35.7% to 35.9% between 2012 and 2013 due to the rises in personal income tax (+0.12 percentage points) and employee social security contributions (+0.08 percentage points). In contrast, the OECD average employer social security contributions decreased by 0.06 percentage points (Annual change of tax wedge components between 2012 and 2013).

 

Changes in OECD tax wedge components between 2012 and 20131

Tax wedge trends between 2012 and 2013

1.Single individual without children at the average wage level.
2. Includes payroll taxes.
Sources: country submissions, OECD Economic Outlook Volume 2013 (No. 94).

 

  • The average personal income tax as percentage of total labour costs increased in 20 countries (Australia, Austria, Canada, Estonia, Finland, France, Germany, Iceland, Israel, Italy, Korea, Luxembourg, Mexico, New Zealand, Poland, Portugal, Turkey, Spain, Sweden and Switzerland). It increased the most in Portugal (+3.54 percentage points) due to higher statutory personal income tax rates and in Luxembourg (+1.09 percentage points) as a result of frozen income tax schedule.
  • The average employee social security contributions as percentage of total labour costs increased in 11 countries (Belgium, Canada, Denmark, France, Greece, Ireland, Japan, Korea, Netherlands, Norway and the United States). It increased the most in the United States (+1.82 percentage points) as the temporary reduction in pension contribution rate that was introduced in 2011 ended in 2013.
  • In contrast, the average employer social security contributions as percentage of total labour costs decreased in 10 countries (Belgium, Estonia, France, Germany, Greece, Iceland, the Netherlands, Norway, the United Kingdom and the United States). It decreased the most in France (-1.92 percentage points) due to the introduction of an income related tax credit (CICE – Crédit d’Impôt pour la Compétitivité et l’Emploi) in 2013. There was also a decrease of more than 1 percentage point (-1.35) in the Netherlands due to lower contribution rates for the general unemployment fund and invalidity.

C. Tax wedge trends for the average single worker since 2007

The OECD average tax wedge as percentage of total labour cost for those earning the average wage.

  • increased by 0.2 percentage points from 35.7 to 35.9% between 2012 and 2013,
  • increased by 0.8 percentage points from 35.1 to 35.9% between 2010 and 2013,
  • previously declined by 1 percentage point from 36.1 to 35.1% between 2007 and 2010. (Changes in OECD Tax wedge components between 2007 and 2013)


Changes in OECD tax wedge components between 2007 and 20131

Tax wedge changes between 2007 and 2013

1.Single individual without children at the average wage level.                
2. Includes payroll taxes.
Sources: country submissions, OECD Economic Outlook Volume 2013 (No. 94).

 

Between 2007 and 2010, the tax wedge decreased in 23 OECD countries and increased in 10. The largest decreases were in Hungary (-7.9 percentage points), Turkey (-4.8 percentage points), Israel (-4.2 percentage points) and New Zealand (-4.1 percentage points) (Tax wedge annual change between 2007 and 2010).

The tax wedge decline was mostly due to lowered PIT burden.

  • Reduced statutory tax rates in 5 countries (Israel, Finland, Canada, Austria and Norway).
  • Tax schedules were extended with additional lower income brackets and tax rates in Greece, New Zealand and Mexico. The medium tax bracket was suspended in Denmark. In Australia, income thresholds were increased and consequently income bracket scales broadened.
  • Tax allowances and credits increased relative to earnings in 9 countries (Hungary, Sweden, Israel, Finland, the Slovak Republic, Switzerland, the United Kingdom, Germany and Portugal) due to tax relief reformed schemes or increased basic amounts.
  • The average worker tax burden was also alleviated by tax credits or universal cash transfers that were introduced during that period in Denmark (“Green Check”), Luxembourg (“wage earner refundable tax credit”) and Turkey (“Minimum Living Relief”).

Between 2010 and 2013, the tax wedge rose in 21 OECD countries and fell in 9, partially reversing the reductions between 2007 and 2010 (Tax wedge annual change between 2010 and 2013).

PIT was the main factor in the OECD tax wedge increase between 2010 and 2013. PIT burdens rose in 25 out of 34 countries between 2010 and 2013, largely because a higher proportion of earnings was subject to tax as the value of tax free allowances and tax credits fell relative to earnings. Only 6 countries (Australia, Denmark, Greece, the Netherlands, Portugal and Spain) increased their statutory income tax rates for workers on average earnings. Surtaxes introduced during that period were still in place at the end of 2013 in 2 countries:

  • In Japan, taxpayers have been required to file tax returns and make tax payments for additional 2.1% of the base income taxes from 2013 through 2037 annually together with the regular income tax of respective years.
  • In Portugal, a surtax was introduced in 2011 and re-introduced in 2013 for taxable income above the annual national minimum wage, with a tax credit for dependents.

D. Tax wedge for families with children

The OECD average tax wedge  for a one earner couple with two children was 26.4% of the total labour cost in 2013.  This figure was 9.5 percentage points lower than the one observed for the individual without children (Comparison of total tax wedge by family type). In fact, many OECD countries provide a fiscal benefit to the former through advantageous tax treatment and/or cash transfers.

Tax wedge by family type in 20131,2

Tax wedge by family type in 2013

1.Countries ranked by decreasing tax wedge of the one earner couple with two children.
2. The households are at the average wage level.
Sources: country submissions, OECD Economic Outlook Volume 2013 (No. 94).

 

In 2013, the highest tax wedges for one earner couples with two children at the average wage were in Greece (44.5%), France (41.6%) and Belgium (41.0%). New Zealand had the smallest tax wedge for these families (2.4%), followed by Ireland (6.8%), Chile (7%), and Switzerland (9.5%).

The savings realised by a one earner married couple compared to a single worker were greater than 20 per cent of labour costs in the Czech Republic and Luxembourg and greater than 15 per cent of labour costs in three other countries - Germany, Ireland and Slovenia. 

At the other end of the scale, the tax burdens were the same in Chile and Mexico and different by less than three percentage points in Greece, Korea and Turkey.

In 2013, the tax wedge of a one earner married couple with two children increased in 21 and fell in 12 OECD countries (Comparison of  total tax wedge by family type)

  • In 80% of countries the change did not exceed plus or minus one percentage point.
  • There were increases of greater than 1 percentage point in four countries - New Zealand and Portugal (+1.9), the Slovak Republic (+1.8) and the United States (+1.6).
  • The tax wedge fell by 1.5 percentage points in France and the Netherlands; and by lower amounts in ten other countries: Belgium, the Czech Republic, Denmark, Estonia, Germany, Hungary, Italy, Slovenia, Switzerland and the United Kingdom.

The fiscal preference for families compared with singles increased in 7 OECD countries: Belgium, the Czech Republic, France, Italy, Luxembourg, Portugal and Switzerland. Additionally, the effects of changes in the tax system on the tax wedge were independent of the family type in Chile, Denmark, Ireland, Japan, Mexico and Turkey.

Downloadable tables/figures

Tax wedge 2013

Annual change of tax wedge components between 2012 and 2013

Changes in OECD Tax wedge components between 2007 and 2013

Annual change of tax wedge components between 2007 and 2010

Annual change of tax wedge components between 2010 and 2013

Comparison of total tax wedge by family type

Tax wedge definitions

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