In 2011, tax wedges rose in 26 out of 34 countries according to a new report published by the Organisation for Economic Co-operation and Development (OECD). The “Taxing Wages” report found there were increases of more than one percentage point in four countries. Worldwide, the average tax rate is 35.3 percent. With these increases in tax wedge combined with inflation during 2011 (world average for developed countries: 3.0 percent), workers in many countries will have felt their take home pay squeezed.
The largest increase was in Hungary (2.77 percentage points), followed by Luxembourg and Portugal. New Zealand (-1.12 percentage point) was the only country with a decrease of more than one percentage point.
The tax wedge is a measure of the difference between labor costs to the employer — the sum of personal income tax, employee plus employer social security contributions together with any payroll tax, minus benefits — and the corresponding net take-home pay of the employee. Employer social security contributions and, in some countries, payroll taxes are added to gross wage earnings of employees in order to determine a measure of total labor costs to the employer. Of course, true labor costs are likely higher than this measure because employers may also have to make non-tax compulsory payments that are not included in the calculations.
For consistency, we have used the OECD measures for the tax wedge for average single workers without children in this article, although assessments of seven other different family types are given in the OECD report.
Higher income taxes were the major factor in 18 of the 26 countries that showed a higher tax wedge. Ireland saw the largest increases in income taxes as a percentage of labor costs (3.82 percentage points), though more than half of the increase was offset by a reduction in employee social security contributions.Hungary saw an increase of 2.4 percentage points. Meanwhile, New Zealand’s wedge dropped 1 percentage point due to income taxes.
In contrast, higher employee and employer social security contributions accounted for virtually all the increased tax wedge in Germany, Japan, Korea, Luxembourg and Norway (see table below).
Tax rates in OECD countries varied between Belgium (55.5 percent) and Chile (7 percent) while the OECD average is 35.3 percent. In Belgium, Germany, Hungary and France, the tax wedge rates are around 50 percent or higher, while they are less than 20 percent in Chile, Israel, Mexico and New Zealand.
European countries dominate the top 22 places in the report. Outside of Europe, the countries with the highest tax wedge are Canada and Japan (both 38 percent followed by the U.S. at 29.5 percent. In the United States, the overall tax wedge fell by 0.9 percentage points in 2011, due to a decrease in employee social security contributions that outweighed an increase in income taxes following the expiration of the temporary “Making Work Pay” non-wastable tax credit.
The OECD report also analyzes trends over time in statutory personal income tax (PIT) and employee social security contribution (SSC) rates, the income thresholds where they apply, and other statutory provisions that shape average and marginal personal tax rates in OECD countries.
The most pronounced trend identified has been the reduction in top statutory PIT rates, inclusive of surtaxes and sub-central income taxes. The average OECD-wide top statutory PIT rate decreased significantly in each of the last three decades, from 65.7 percent in 1980 to 46.5 percent in 2000, and to 41.7 percent in 2010. More recently, this trend appears to have come to a halt — in 2010 and 2011 more countries increased rather than reduced their top PIT rates.
Over the last decade, almost two-thirds of OECD countries have also reduced the income threshold at which the top statutory PIT rate starts to apply, though in the majority it is still more than twice the average wage. For people earning average wages, the statutory PIT rate fell across the OECD from an average 30.5 percent in 2000 to 27.4 percent in 2010, with the corresponding average personal income tax rate falling from 16 percent to 14.5 percent. For low income earners, there were no clear trends in the level of income at which an individual starts to have to pay tax, or in the starting rate of tax
Click here to download the OECD Taxing Wages report.
Comparison of total tax wedge|
As percent of labor costs1
|Country2||Total Tax Wedge 2011||Annual Percentage-Point Change 2010-2011|
|Tax Wedge||Income Tax||Employee SSC||Employer SSC|
1. Single individual without children at the income level of the average worker.|
2. Countries ranked by decreasing labor costs.
3. The 2011 figures for Greece are not currently available
Sources: country submissions, OECD Economic Outlook Volume 2011 (No. 90).