Taxing Wages 2004-2005

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New material

Unique information on income tax, social security contributions and cash benefits as they affect typical families.  Also, a new definition of the average wage has been introduced for the first time and used consistently for the years 2000-2005.

Excerpt

This annual publication provides details of taxes paid on wages in all thirty member countries of the OECD. The information contained in the Report covers the personal income tax and social security contributions paid by employees and their employers, and cash benefits received by families. The objective of the Report is to illustrate how personal income taxes and social security contributions are calculated and to examine how these levies and cash family benefits impact on net household incomes. The results also allow quantitative cross-country comparisons of labour cost levels and of the overall tax and benefit position of single persons and families.

The Report shows the amounts of taxes, social security contributions and cash benefits for eight family-types, which differ by income level and household composition. It also presents the resulting average and marginal tax rates. Average tax rates show that part of gross wage earnings or total labour costs which is taken in tax (before and after cash benefits) and social security contributions. Marginal tax rates show the part of an increase of gross earnings or total labour costs that is paid in these levies.

The focus of the Report is the presentation of accurate estimates of the tax/benefit position of employees in the edition year (2005). In addition, the Report shows definitive data on the tax/benefit position of employees for the year 2004.

This excerpt from the full Report provides an overview of the results for 2005. It includes tables and graphs comparing results by country. A full version of the Report is available on line at new.sourceOECD.org.

Review of results for 2005

This year, a new definition of the average wage has been used in this publication. Table I.1 compares gross wage earnings of the average worker under the old and new definition in each OECD member country. In this year’s edition of the Report, the annual income of employees is equal to a given fraction of the average gross wage earnings of adult, full-time both manual and non-manual workers covering industry Sectors C-K inclusive with reference to the International Standard Industrial Classification of All Economic Activities, Revision 3 (ISIC Rev. 3) of each OECD country, also referred to as the average wage (new definition). Previous editions of this Report have been based on the narrower concept of average full time wages of manual workers in the manufacturing sector, referred to as the average worker (APW) wage (old definition).

The move to the new definition has implied an increase of more than twenty per cent in gross wage earnings of the average worker for six countries (Austria, France, Greece, Hungary, Portugal and the United Kingdom). For three additional countries the increase in the gross wage earning was between fifteen and twenty per cent (Germany, Luxembourg and Sweden). In contrast, this move has implied a decrease of more than fifteen per cent for the United States and more than five per cent for Australia, Canada and New Zealand. The other four countries that have experienced a decrease in the gross average wage were the Czech Republic, Denmark, Iceland and Italy. For Ireland, Korea and Turkey the gross wage earnings of the average worker under the new definition was not available and, therefore, the latest figure under the old definition was used.

Table I.2 presents the total tax wedge between total labour costs to the employer and the corresponding net take-home pay for single workers without children at average earnings levels in 2005 and analyses the change in the tax wedge between 2004 and 2005 for all OECD countries. The tax wedge varied widely across OECD countries (column 1): it exceeded 50 per cent in Belgium, Germany, France and Hungary and was lower than 19 per cent in Korea and Mexico. The increase between 2004 and 2005 of the tax wedge of an average worker (column 2) varied between 2 percentage points (Mexico) and -4.15 percentage points (Slovak Republic). Germany (-1.5 percentage points) and Hungary (-1.24 percentage points) were the only other OECD member countries in which the changes in the tax wedge did not fall in the range of plus or minus one percentage point. The tax wedge has increased in seventeen OECD member countries and fell in twelve. To a large extent, changes in tax wedges reflect changes in income tax. However, the main drivers of the change in the tax wedge in Finland, Poland, the Slovak Republic, Japan and Korea are the social security contributions. Changes in income taxes are offset by changes in social security contributions in Austria, Finland, Denmark, the Netherlands, the Slovak Republic, Canada and Korea. In France and Sweden, the main drivers of the changes in the tax wedge are jointly changes in income tax and changes in employer’s SSC.

The mix of taxes paid out of total labour costs varies greatly between countries. Table I.3 and Chart I.1 decompose the tax wedge in the income tax, the employee and the employer social security contributions. The portion of labour costs paid in personal income tax is less than five per cent in Korea (2.5 per cent) and Greece (4.3 per cent); whereas it exceeds 30 per cent in Denmark (30.2 per cent). The portion representing employee social security contributions also varies widely, ranging from zero per cent in Australia and New Zealand to over 19 per cent in the Netherlands and Poland. Employers pay 29.7 per cent of total labour costs in social security contributions (including payroll taxes where applicable) in France, 26.3 per cent in Hungary and 25.9 per cent in the Czech Republic. In contrast, employers in New Zealand are not subject to these levies, while in Denmark employer contributions are negligible (0.5 per cent).

The mix of taxes paid out of gross wage earnings varies greatly between countries. Chart I.2 provides a graphical representation of the personal average tax rate decomposed between income tax and employee social security contributions. At the average earnings level, single workers without children pay over 40 per cent of their annual wages in personal income tax and employee social security contributions in Belgium, Germany and Denmark. In Japan, Ireland, Korea and Mexico, the personal average tax rate was below 20 per cent. Average workers in Australia and New Zealand pay only income tax while their counterpart in Poland is paying almost entirely social security contributions.

Many OECD countries provide a fiscal benefit to families with children relative to single individuals through advantageous tax treatment and/or cash transfers. Chart I.3 provides the burden of income tax plus employee social security contributions less cash benefits for single individuals at 100 per cent of the earnings of an average worker and for a married one-earner couple with two children at the same earnings level. In 9 OECD countries, the income tax burden faced by a one-earner married couple with two children is less than half that faced by a single individual (Australia, the Czech Republic, Iceland, Ireland, Luxembourg, Portugal, the Slovak Republic, Switzerland and the United States). In contrast, there is no difference in Mexico and Turkey.

Table of contents

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