Taxes Take a Smaller Bite in Many OECD Countries

20/02/2003 - The taxman took a smaller bite out of paycheques over the last two years in many OECD countries, but married couples with children often continued to enjoy substantial advantages over their single counterparts.

Those are some of the key conclusions in an upcoming OECD publication, Taxing Wages. The report presents a country-by-country evaluation of the difference between workers' gross wages and what actually ends up in their pockets. In addition, it reports that total taxes on wages, including social taxes on employers, are also declining in many OECD countries.

The report evaluates taxes paid, as well as benefits received, by eight types of families with differing income and household composition. Researchers subtract personal income tax and employee social security contributions, and then add back family-related cash benefits from the government. For example, the tax bill for an average production worker with a spouse and two children fell in 20 OECD countries between 2000 and 2002 ( Chart 1).

As one would expect, households with higher incomes generally pay a higher proportion of their income in tax, and households with children typically pay less than those without. For single individuals with the income of an average production worker, the tax burden in 2002 ranged from a low of 3.6% in Mexico to a high of 43.1% in Denmark ( Table 1). For a married couple with two children, the burden ranged from -3.6% in Luxembourg, to 30.5% in Denmark. The negative tax burden in Luxembourg, as well as in Iceland and Ireland, reflect tax credits and/or family benefits that exceed the taxes owed.

The difference between the taxes paid by married couples with children and those paid by single individuals varies greatly from country to country. For the average production worker in Germany, Hungary, Iceland and Luxembourg, for example, the effective tax rate for families can be more than 20 percentage points lower than that for singles. In 15 other countries -- Austria, Belgium, Canada, the Czech Republic, Denmark, France, Ireland, Italy, the Netherlands, Norway, Portugal, the Slovak Republic, Switzerland, the United Kingdom and the United States-- the tax advantage for families can exceed 10 percentage points. These differences are examined in more detail in the upcoming Taxing Wages publication.

The tax burden also fell in many OECD countries when employers' social security contributions are taken into account. Total taxes on wages are important because they introduce a wedge between the cost of labour to employers and workers' take-home pay. OECD studies show that this "tax wedge" has a particularly important influence on the employment prospects of low-paid workers - the smaller the tax wedge, the better the employment prospects.

In the case of low-paid, single workers, the tax wedge shrank by at least 1.5 percentage points between 2000 and 2002 in Finland, France, Hungary, Ireland, Luxembourg, the Netherlands, Sweden and the United States ( Chart 2). On the other hand, it increased by at least the same amount in Mexico and Turkey.

Further results from the new edition of Taxing Wages are available on the OECD Internet Site. The full publication, due in April, will provide readers with more detailed results, methodological information, and country-specific analysis.

For further information about the report, journalists are invited to contact Christopher Heady, Head of the OECD's Tax Policy, Tax Statistics & Horizontal Programmes Division (Tel. [33] 1 45 24 93 22).

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