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. The overall cost of employment is a key factor in companies’ hiring decisions, and thus, indirectly, a factor affecting unemployment trends.
At the top end of the scale, single individuals without children earning the average wage in services and manufacturing industries faced a tax wedge in 2008 of 56.0% of the cost of their labour to their employers in Belgium, 54.1% in Hungary and 52.0% in Germany. In all three of these countries, the average employee takes home less than half of the total cost of employing them that is born by their employers. At the bottom end of the scale, a single person without children earning the average wage faced a tax wedge of 15.1% in Mexico, 20.3% in Korea and 21.2% in New Zealand. The average for OECD countries was 37.4%.
For a one-earner married couple with two children on average earnings, by contrast, the tax wedge ranged from 43.9% in Hungary, 42.7% in Greece and 42.1% in France to 3.5% in New Zealand, 5.5% in Ireland and 10.4% in Iceland. The average for OECD countries was 27.3%.
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.
In 2008, the average tax wedge for single persons without children fell in 15 OECD countries while it rose in the other 15 OECD countries. Changes have been minimal in most cases, however. From 2007 to 2008, the tax wedge did not rise by more than one percentage point in any OECD member country. It fell by more than 1 percentage point in Turkey, Poland, Spain and the United Kingdom.
This year’s edition of Taxing Wages includes newly developed graphs that show the tax burden on earnings between 50 per cent and 250 per cent of the average wage in 2008. The average wage represents the average gross earnings received by average full-time both manual and non-manual workers in 2008 in each particular OECD member country. The graphs show that low-income families with children are net receivers of the tax-benefit system in many OECD countries. For instance, one-earner married couples with 2 children do not pay taxes and employee social security contributions net of cash benefits on earnings below 80 per cent of the average wage in Australia, Canada, Iceland, New Zealand, Luxembourg, Ireland and the Czech Republic.
Taxpayers face marginal tax rates (measuring income taxes and employee social security contributions net of cash benefits on an additional unit of earnings) and tax wedges (when also employer social security contributions are take into account) of more than 80 per cent in a number of OECD countries. In many cases, those peaks occur in a quite narrow income band. High marginal tax rates for low-income taxpayers and families with children are often the result of a reduction in benefits, allowances or tax credits that are targeted at low-income taxpayers or families with children and that are reduced when taxpayers start earning more income.
High marginal tax rates can be observed for low-income single taxpayers without children in Belgium and Ireland and also for taxpayers in Mexico. Families with children face very high marginal tax rates and tax wedges at particular income levels in Belgium, Canada, the Czech Republic, Ireland, Italy, Japan, Mexico, Poland, Portugal and the Slovak Republic.
