Tax burdens on labour income in OECD continues to rise
26/03/2013 - New data show that across OECD countries the average tax and social security burden on employment incomes increased by 0.1 of a percentage point to 35.6 per cent in 2012. It increased in 19 out of 34 countries, fell in 14, and remained unchanged in 1.
The increases were largest in the Netherlands, Poland and the Slovak Republic (mainly due to increased rates and other changes to employer social security contribution) as well as Spain and Australia (due to higher statutory income tax rates).
This follows substantial increases in 2011. Since 2010, the tax burden has increased in 26 OECD countries and fallen in 7, partially reversing the reductions between 2007 and 2010.
Over the past two years, income tax burdens have risen in 23 out of 34 countries, largely because a higher proportion of earnings was subject to tax as the value of tax free allowances and tax credits fell relative to earnings. In 2012, only 6 countries had higher statutory income tax rates for workers on average earnings than in 2010.
This dataset will be available in Taxing Wages 2013 (to be published on 10 May 2013). The report provides details about the taxation of employment incomes and the associated costs to employers for different household types and at different earnings levels on an internationally comparable basis – key factors in whether individuals seek employment and businesses hire workers.
The tax burden is measured by the ‘tax wedge as a percentage of total labour costs’ – or the total taxes paid by employees and employers, minus family benefits received, divided by the total labour costs of the employer. Taxing Wages also breaks down the tax burden between personal income taxes (PIT), including tax credits, and employee and employer Social Security Contributions (SSC).
Key Taxing Wages results in 2012 included:
• The highest average tax burdens for childless single workers earning the average wage in their country were observed in Belgium (56.0%), France (50.2%), Germany (49.7%) and Hungary (49.4%). The lowest were in Chile (7%), New Zealand (16.4%) and Mexico (19.0%). (See table 1 in excel).
• The average tax burden for those earning the average wage increased by a 0.5 percentage point rise in 2011 and 0.1 percentage points in 2012 to reach 35.6 per cent. This followed a decline from 36.1 to 35.0 per cent between 2007 and 2010. (See table 2 in excel).
• The main contributors to the 2012 increase in the average OECD total tax wedge were changes to employer social security contributions, with increases in the contribution rate in 8 OECD countries, most notably Poland (+1.2 percentage points), the Slovak Republic (+0.8) and the Netherlands (+0.6).
• In 13 of the 19 countries with an increased tax wedge in 2012, the PIT wedge also rose. The tax burden increases in Spain (+1.4 percentage points) and Australia (+0.6) were respectively due to higher income tax rates and the introduction of a temporary additional levy to finance post-cyclone reconstruction. Changes to PIT were the primary factor in where the tax burden fell - the largest decrease was in Portugal (-1.3 percentage points) where there was a reduction in the surtax rate.
• The highest tax wedges for one-earner/two children families at the average wage were in France (43.1%), Greece (43.0%), Belgium (41.4%) and Italy (38.3%). New Zealand had the smallest tax wedge for these families (0.6%), followed by Ireland (6.4%), Chile (7%), and Switzerland (9.5%). The average for OECD countries was 26.1%. (See table 3 in excel).
• Due to the abolition of tax allowances for dependent children, Japan saw the largest increase in the tax burden for one earner families with children (+2.4 percentage points) compared with a 0.3 percentage points increase for the single average workers.
• In all OECD countries except Mexico and Chile, the tax wedge for families with children is lower than that for single individuals without children. The differences are particularly large in the Czech Republic, Luxembourg, Germany, Hungary, Ireland, New Zealand and Slovenia.
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Working paper analysing tax progressivity
An accompanying OECD Working Paper analyses the progressivity (when the average effective tax rate/wedge increases with income) of personal income tax and social security contribution schedules (SCCs) for single taxpayers and one-earner married couples who have up to 2 children and make between 50% and 200% of the average wage. This progressivity arises from tax provisions which exempt certain amounts of income from tax, especially if these provisions decline as income rises and from increases in statutory tax rates.
Overall, personal income tax regimes are progressive in all OECD countries, though there are significant variations in the rate at which the average tax burden rises with income. In most OECD countries, progressivity is greatest at lower income levels through the impact of basic tax allowances and tax credits.
SSCs lower the progressivity of the tax system because there is usually a single bracket with a fixed contribution rate and often there is no exemption for low-incomes (or a smaller exemption than for income tax). SSC ceilings may also make the tax system regressive at high income levels, such as in Spain, Germany and Austria. However, targeted SSC provisions and reduced SSC rates targeted at lower incomes increase progressivity at the bottom of the income distribution in some countries, especially in Ireland, Belgium and France, but also in Canada, the UK, Israel, the Netherlands.
Cash benefits for children also increase tax progressivity, especially if they are phased out when income increases. At low and middle income levels, the impact from cash benefits on progressivity tends to be stronger than the flattening effect from SSCs.
Non-tax compulsory payments
In some countries a range of insurance-related benefits are provided not through SSCs to government but through compulsory payments to privately-managed pension funds or insurance companies. These countries include Australia, Chile, Iceland, Israel, Italy, Mexico, the Netherlands, Poland, the Slovak Republic and Switzerland. More information on these “non-tax compulsory payments” is included in the OECD Tax Database.
Further information including the key results, is available at www.oecd.org/tax/tax-policy/taxingwages.htm. This webpage includes an “Information by Country” section which separately discusses the main trends for each OECD member country.