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OECD Study Shows Tax Wedges Continue to Fall

 

17/03/2004 - Tax wedges on labour, or the difference between what employers pay out in wages and social security charges and what employees take home after tax and social security deductions, are falling in many OECD countries, helping to reduce a major obstacle to job creation and people's willingness to work.

According to the forthcoming edition of the OECD's annual publication Taxing Wages, the tax wedge for a typical married production worker with two children, measured as a percentage of the overall cost to the employer, has declined over the last seven years by about one and half percentage points across the OECD's 30 member states.

Ireland saw the biggest fall in the tax wedge from 1996 to 2003, with a reduction of 18.3 percentage points, followed by Hungary (9.9 percentage points), the United States (8.3 percentage points), Italy (8.2 percentage points) and the United Kingdom (7.0 percentage points). However, in a number of countries the tax wedge increased over the period, with Iceland seeing the biggest increase, at 9.5 percentage points, followed by the Slovak Republic (7.1 percentage points), and Turkey (3.8 percentage points) (see Chart A).

The report, due out this Spring, will highlight the widely varying rates of personal income taxes, social security contributions and cash benefits that apply to workers in OECD countries, depending on income, family circumstances and country of residence. But it will also confirm some significant features common to taxation systems in most OECD countries. Most OECD countries continue, for example, to offer significant benefits to married couples with children compared to single earners (see Table A). And a comparison between the tax rates imposed on various levels of income shows all OECD countries taking account of the individual’s ability to pay in fixing the levels of taxes on income (see Table B).

Based on 2003 figures, the tax wedge for a single worker with average earnings was highest in Belgium (54.5 percent), followed by Germany (52.0 percent), and lowest in Korea (14.1 percent), followed by Mexico (17.3 percent).  For a one-earner married couple with two children at the same earnings level, the tax wedge ranged from 42.1 percent in Turkey and 41.3 percent in Poland to 7.4 percent in Ireland and 8.9 percent in Iceland.  On average, the tax wedge for a single production worker on average earnings represented 36.5% of labour costs, compared with 26.9% for a one-earner married couple with two children. 
 

A review of the tax burdens for single workers earning two-thirds more than the average with those for single workers earning one-third less than the average shows fairly significant differences in the level of taxes paid. Based on 2003 figures, a single worker earning two-thirds more than an average production worker faces a tax wedge of, on average, 41.4% of labour costs, while a single worker earning one-third less than an average production worker faces a tax wedge of 32.7%.

In addition to reporting tax burdens and the size of tax wedges for various household types at different income levels, Taxing Wages contains a detailed description of national wage taxes and cash benefits applying in all OECD countries. Further findings are available on the OECD's Web site at
www.oecd.org/ctp/taxingwages.

For further information, journalists are invited to contact Christopher Heady, Head of the OECD's Tax Policy, Tax Statistics and Horizontal Programmes Division (tel. (33) 1 4524 9322).

 


 

Table A

Household Tax Wedge in 2003

(as a % of total labour costs equivalent to the average production worker) (1)

Country

Single persons without children

One earner family with two children

Absolute Difference

Difference relative to the burden of single person (%)

Australia

28.3

 

20.4

 

-7.9

 

-27.9

 

Austria

45.0

 

29.5

 

-15.5

 

-34.4

 

Belgium

54.5

 

39.0

 

-15.5

 

-28.4

 

Canada

32.4

 

23.3

 

-9.1

 

-28.1

 

Czech Republic

43.8

 

30.6

 

-13.2

 

-30.1

 

Denmark

42.7

 

30.1

 

-12.6

 

-29.5

 

Finland

44.5

 

37.8

 

-6.7

 

-15.1

 

France

48.3

 

40.0

 

-8.3

 

-17.2

 

Germany

52.0

 

33.5

 

-18.5

 

-35.6

 

Greece

34.3

 

34.3

 

0.0

 

0.0

 

Hungary

45.7

 

30.5

 

-15.2

 

-33.3

 

Iceland

29.3

 

8.9

 

-20.4

 

-69.6

 

Ireland

24.5

 

7.4

 

-17.1

 

-69.8

 

Italy

45.3

 

35.5

 

-9.8

 

-21.6

 

Japan

27.0

 

23.2

 

-3.8

 

-14.1

 

Korea

14.1

 

13.6

 

-0.5

 

-3.5

 

Luxembourg

31.7

 

9.6

 

-22.1

 

-69.7

 

Mexico

17.3

 

17.3

 

0.0

 

0.0

 

Netherlands

43.0

 

33.7

 

-9.3

 

-21.6

 

New Zealand

20.6

 

20.4

 

-0.2

 

-1.0

 

Norway

36.8

 

27.6

 

-9.2

 

-25.0

 

Poland

42.9

 

41.3

 

-1.6

 

-3.7

 

Portugal

32.6

 

23.7

 

-8.9

 

-27.3

 

Slovak Republic

41.4

 

32.3

 

-9.1

 

-22.0

 

Spain

37.6

 

30.9

 

-6.7

 

-17.8

 

Sweden

46.6

 

39.5

 

-7.1

 

-15.2

 

Switzerland

29.2

 

17.8

 

-11.4

 

-39.0

 

Turkey

42.1

 

42.1

 

0.0

 

0.0

 

United Kingdom

31.1

 

18.3

 

-12.8

 

-41.2

 

United States

29.4

 

15.5

 

-13.9

 

-47.3

 

Unweighted Average

36.5

 

26.9

 

-9.6

 

-26.3

 

(1) The tax wedge reflects Income tax plus employee contributions less cash benefits plus employer social security contributions.

Source: OECD (2004), Taxing Wages 2002-2003 - Online database: SourceOECD Taxing Wages

 

Table B

Tax Wedge for Single Persons in 2003

(as a % of total labour costs) (1)

Country

Single persons at 167% of APW earnings

Single persons at 67% of APW earnings

Absolute Difference

Difference relative to the burden of the higher paid worker (%)

Australia

36.7

 

24.7

 

-12.0

 

-32.7

 

Austria

50.2

 

40.2

 

-10.0

 

-19.9

 

Belgium

60.3

 

47.5

 

-12.8

 

-21.2

 

Canada

33.3

 

27.6

 

-5.7

 

-17.1

 

Czech Republic

46.2

 

42.0

 

-4.2

 

-9.1

 

Denmark

50.3

 

39.9

 

-10.4

 

-20.7

 

Finland

50.4

 

39.5

 

-10.9

 

-21.6

 

France

50.7

 

37.6

 

-13.1

 

-25.8

 

Germany

57.0

 

46.7

 

-10.3

 

-18.1

 

Greece

40.2

 

34.3

 

-5.9

 

-14.7

 

Hungary

55.8

 

41.0

 

-14.8

 

-26.5

 

Iceland

38.5

 

23.8

 

-14.7

 

-38.2

 

Ireland

35.2

 

16.7

 

-18.5

 

-52.6

 

Italy

50.2

 

41.3

 

-8.9

 

-17.7

 

Japan

29.6

 

26.1

 

-3.5

 

-11.8

 

Korea

19.0

 

12.9

 

-6.1

 

-32.1

 

Luxembourg

39.6

 

27.3

 

-12.3

 

-31.1

 

Mexico

23.0

 

12.4

 

-10.6

 

-46.1

 

Netherlands

39.9

 

37.6

 

-2.3

 

-5.8

 

New Zealand

26.4

 

18.9

 

-7.5

 

-28.4

 

Norway

43.3

 

33.7

 

-9.6

 

-22.2

 

Poland

43.9

 

41.6

 

-2.3

 

-5.2

 

Portugal

38.1

 

29.6

 

-8.5

 

-22.3

 

Slovak Republic

44.6

 

40.3

 

-4.3

 

-9.6

 

Spain

41.5

 

32.8

 

-8.7

 

-21.0

 

Sweden

51.2

 

44.8

 

-6.4

 

-12.5

 

Switzerland

33.4

 

26.6

 

-6.8

 

-20.4

 

Turkey

44.5

 

40.9

 

-3.6

 

-8.1

 

United Kingdom

34.2

 

26.2

 

-8.0

 

-23.4

 

United States

34.6

 

27.1

 

-7.5

 

-21.7

 

Unweighted Average

41.4

 

32.7

 

-8.7

 

-21.0

 

(1) The tax wedge reflects Income tax plus employee contributions less cash benefits plus employer social security contributions.

Source:   OECD (2004), Taxing Wages 2002-2003 - Online database: SourceOECD Taxing Wages

 

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