Taxes on wages, including both employer and employee social security charges, are a key factor in companies’ hiring decisions and individuals’ incentives to work. As part of efforts to restore public finances and put the economy on a higher growth path, governments should consider shifting the tax mix away from direct to indirect taxes (e.g. by increasing recurrent taxes on immovable property) and broadening the VAT and personal income tax base by eliminating tax expenditures, rather than increasing personal income tax rates and social security charges.
Taxing Wages provides detailed analysis on the taxation of employment income across OECD countries and the distribution of this tax burden across different household types and levels of earnings.
The report calculates the difference between the total cost to an employer of employing someone and that person’s net take-home pay, including child benefits and other family benefits that are generally available to households. The “tax wedge” is derived as the total taxes paid by employees and employers net of cash transfers received divided by the employer’s total payroll costs.
In 2010, Taxing Wages indicates that:
- France, Belgium and Italy were the highest-tax countries for one-earner married couples with two children earning the average wage, with tax wedges of 42.1% in France, 39.6% in Belgium and 37.2% in Italy.
- At the bottom end of the scale, New Zealand had the smallest tax wedge for one-earner married couples with 2 children earning the average wage (-1.1%), followed by Chile (6.2%), Switzerland (8.3%) and Luxembourg (11.2%). The average for OECD countries was 24.8%.
- Belgium, France and Germany had the highest tax wedges for single workers without children on average wages, at 55.4%, 49.3% and 49.1% respectively, though the tax wedge decreased by nearly 2 percentage points in Germany in 2010.
- At the other end of the scale, the tax wedge in Chile and Mexico for single workers without children on average wages was only 7% and 15.5%, respectively. In New Zealand, the figure was 16.9% and in Korea it was 19.8%. The average for OECD countries was 34.9%.
- In Hungary, lower employer social security charges and especially income taxes led to a 6.7 percentage point reduction in the tax wedge for a single person on the average wage, while in Germany, a cut in income taxes led to a 1.8 percentage point reduction. In Denmark, lower income taxes and a new “green check” to compensate for increased environmental taxes have led to a 1.2 percentage point reduction in the tax wedge.
- In the Netherlands, increased employee social security charges led to a 1.2 percentage point increase in the tax wedge. Higher income taxes resulted in a 1.4 percentage point increase in the tax wedge for single taxpayers at average earnings in Spain, while an increase in employer social security charges and income taxes in Iceland resulted in a 3.3 percentage point increase in the tax wedge.
- Ireland increased income taxes and the health levy while it decreased child benefits. The impact of these reforms on the tax wedge has been partly offset by the decrease in the average wage (the impact of the latter is about -0.4 percentage points on average). Because of the progressivity of tax regimes, lower earnings mean that a smaller share is taken in tax. This was also the case in Greece, where the strong decrease in the average wage resulted in a decrease in the tax wedge for all families, despite of the increase in marginal income tax rates at higher income levels.
Australia, Chile, Iceland, Israel, Italy, Mexico, the Netherlands, Norway, Poland, the Slovak Republic and Switzerland put large additional burdens on employment costs through compulsory payments which are not regarded as tax, since they are not paid to government, but to privately-managed pension funds or insurance companies. Often, these are paid by the employer, but in Chile, Iceland, Israel, the Netherlands, Poland and Switzerland a large proportion is paid by employees.
This year’s Taxing Wages includes new analysis of tax burden changes comparing 2000 with 2009. On average across the OECD, tax burdens fell across all income levels, particularly due to personal income tax cuts; some countries have also decreased employer social security contributions. On average, tax cuts implemented over this period favour households with children most, and lower earners more than higher earners.
These trends were most marked in Australia, Ireland, New Zealand and Sweden. The biggest exceptions were Greece, Iceland, Japan, Korea and Mexico. The OECD finds that governments that had room for tax cuts over the past decade have generally sought to ensure that working families benefit, particularly those on lower pay and/ or with children. Notwithstanding the recession, there is no sign of this trend being reversed in 2010.
