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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.
This excerpt from the full Report provides an overview of the results for 2004. 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 2004
Table I.1 shows gross wage earnings of the average production worker in each OECD Member country for years 2003 (column 1) and 2004 (column 2). The annual change of the nominal wage of an average production worker – shown in column 3 – varied between 0.3 per cent (Japan) and 20.0 per cent (Slovak Republic). To a large extent, this significant spread reflects the different inflation levels of individual OECD countries – see column 4 of Table I.1. The annual change of real wage levels (before personal income tax and employee social security contributions) is found to be in the 0–4 per cent range for most countries; see column 6 of Table I.1. Only the Slovak Republic (11.4 per cent), the Czech Republic (6.3 per cent), Japan ( 0.1 per cent), Poland ( 0.5 per cent), Germany ( 0.7 per cent), Luxembourg ( 0.9 per cent), Korea ( 1.1 per cent) and Turkey ( 2.2 per cent) show changes in real wage before tax outside this range.
The real disposable wage of the average production worker is also influenced by the change in the personal average tax rate – shown in column 6 of Table I.1. In 2004, in almost all countries, the change of this tax burden measure at the average production workers’ wage level remained between minus and plus one per cent. In two countries, this measure of the tax burden increased by more than one per cent – the Netherlands (2.5 per cent) and the Slovak Republic (1.6 per cent) while it declined by more than one per cent in Denmark ( 1.2 per cent) and Germany ( 1.2 per cent).
Table I.2 summarises personal average tax rates – defined as income tax plus employee social security contributions as a percentage of gross wage earnings – in 2004. 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, Denmark and Germany. In Greece, Ireland, Japan, Korea, Mexico, Portugal, and Spain the personal average tax rate was below 20 per cent.
The mix of taxes paid out of gross wage earnings varies greatly between countries. Chart I.1 provides a graphical representation of the personal average tax rate decomposed between income tax and employee social security contributions. Average production workers in Australia, Iceland and New Zealand essentially pay only income tax while their counterpart in Greece is paying almost only 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 1.2 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 production worker and for a married one-earner couple with two children at the same earnings level. The savings realised by a one-earner married couple is greater than 20 per cent of earnings in Austria, Belgium, Germany, Luxembourg and the Slovak Republic. In contrast, the burden is virtually the same (the gap is less than 1 per cent of gross earnings) in Greece, Mexico, New Zealand and Turkey. It is interesting to note that when cash benefits are taken into account, married one-earner couples face a negative burden in Ireland and Luxembourg because cash benefits exceed the income tax and social security payments.
In most OECD countries, employers pay significant social security contributions. In addition, some countries impose payroll taxes that are distinguished from social security contributions in that they do not create an entitlement to benefit for the corresponding employees and may not even be used to fund social security contributions. For the purposes of this Report, labour costs are defined as being equal to the gross wages paid to employees plus these employer social security contributions and payroll taxes (if any). In 2004, the tax wedge between total labour costs to the employer and the corresponding net take-home pay to single workers without children, at average earnings levels varied widely across OECD countries (See column 4 in Table I.3). The tax wedge exceeded 50 per cent in Belgium and Germany and was lower than 20 per cent in Korea and Mexico.
It is interesting to look at the constituent components of the tax wedge shown in Table I.3. The portion of labour costs paid in personal income tax is less than 5 per cent in Greece, Korea, Mexico and Portugal whereas it exceeds 30 per cent in Denmark. The portion representing employee social security contributions also varies widely, ranging from zero per cent in Australia, Iceland and New Zealand to over 20 per cent in the Netherlands and Poland. Employers pay 28.2 per cent of total labour costs in social security contributions (including payroll taxes where applicable) in France, 26.9 per cent in Hungary, 26.3 per cent in the Slovak Republic, 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.
As a percentage of labour costs, the total of employee and employer social security contributions exceed 25 per cent in half of the OECD countries. They exceed one-third of total labour costs in 10 OECD countries: Austria, Belgium, the Czech Republic, France, Germany, Greece, Hungary, Netherlands, Poland and the Slovak Republic. This result is not surprising given that the social security contribution revenues in these countries amounted to more than 25 per cent of their Gross Domestic Product in 2002 (See Annex I).
Clearly, the impact of taxes and benefits on worker’s take-home pay varies greatly among OECD countries. Such wide variations in the size and make-up of tax wedges reflect in part differences in:
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the overall ratio of aggregate tax revenues to Gross Domestic Product (see Annex I); and,
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the share of personal income tax and social security contributions in national tax mixes.
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