Tax policy analysis

Tax wedges on earnings vary sharply in OECD countries


29/03/2006 - Belgium, Germany and Hungary impose the highest taxes among OECD countries on the pay of a single person on average earnings, while Korea, Mexico and New Zealand take the least, according to the latest edition of the OECD’s annual publication Taxing Wages.

For a single-earner married couple with two children on average earnings, by contrast, Turkey, Sweden and Poland impose the biggest ‘tax wedge’, while Ireland, Iceland and the United States take the smallest slice in tax. Taxing Wages compares the shares of employee earnings taken by governments in OECD countries through taxation by calculating what it calls the ‘tax wedge’, the difference between labour costs to the employer and the net take-home pay of the employee, including any cash benefits from government welfare programmes.

In 2005, single individuals without children earning the average wage in services and manufacturing industries faced a tax wedge of 55.4% of the cost of their labour to their employers in Belgium, 51.8% in Germany and 50.5% in Hungary, compared with 17.3% in Korea, 18.2% in Mexico and 20.5% in New Zealand. The average for OECD countries was 37.3%. See Table 1.

For a one-earner married couple with two children on average earnings, the tax wedge ranged from 42.7% in Turkey, 42.4% in Sweden and 42.1% in Poland to 11.9% in the United States, 11% in Iceland and 8.1 % in Ireland. The average for OECD countries was 27.7%. See Table 2.

These tax wedges result from the combined effects of a range of policy instruments at the disposal of governments: personal income tax, employee and employer social security contributions, payroll taxes and cash benefits. Variations in their levels reflect the differing priorities of governments and voters in different countries with respect to the desired level, composition and financing method of government expenses, including social benefits.  

Tax wedges have shrunk over the past few years in most OECD countries, partly reflecting governments’ desire to get more people into work so as to offset the effects on output and prosperity of ageing populations. However, these tax cuts have been limited by the need to maintain sufficient government revenues. In 2000, the average tax wedge for single persons without children was 37.9%, with Belgium at the top end of the range, with 57.1%, and Korea and Mexico at the bottom end, with 16.4% and 16.8% respectively.

Some countries have focussed their tax wedge reductions on lower paid workers, as this is the group that often experiences particularly high unemployment rates. Table 3 shows that the reductions in the tax wedge for single workers earning two-thirds of the average wage have fallen particularly sharply since 2000 in France (47.4% to 41.4%), Hungary (48.5% to 42.9%) and the Slovak Republic (40.6% to 35.3%).

Taxing Wages is available for journalists on the OECD password protected website or from the OECD’s Media Division (tel. 33 1 4524 9700).

For further information, journalists should contact Christopher Heady, Centre for Tax Policy and Administration (tel. 33 1 4524 9322) or the OECD's Media Division (tel. 33 1 4524 9700).

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