12/04/2016 – Taxes on labour income for the average worker across the OECD remained stable at 35.9% in 2015, ending a series of steady annual increases dating to 2011, according to a new report.

Taxing Wages 2016 shows that while taxes on labour income increased by relatively small amounts in 24 of the 34 OECD countries, this was offset by decreases in eight countries during 2015. Estonia, Greece and Spain experienced significant decreases of at least one percentage point, according to the report.

The level of tax and social security contributions (SSCs) in each country is measured by the ‘tax wedge’ – the total taxes paid by employees and employers, minus family benefits received as a percentage of the total labour costs of the employer.

Taxes on wages have risen by about 1 percentage point for the average worker in OECD countries over the 2010-15 period, even though the majority of governments did not increase statutory income tax rates. Most of the increased tax on wages has resulted from wages rising faster than tax allowances and credits, which is highlighted by the fact that only seven countries had higher statutory income tax rates for workers on average earnings in 2015 than in 2010, while eight countries had lower statutory rates.

The new findings are among the highlights of Taxing Wages 2016, which provides unique cross-country comparative data on the amounts of taxes, SSCs, payroll taxes and cash benefits for eight family-types, which differ by income level and household composition. It also presents the resulting average and marginal tax wedges. Average tax wedges show that part of gross wage earnings or total labour costs which are taken in personal income taxes (before and after cash benefits), SSCs and payroll taxes. Marginal tax wedges show the part of an increase of gross earnings or total labour costs that is paid in these levies.

This year’s report also contains a special chapter examining how the tax and in-work benefit systems, including provisions targeted at children, affect the incentives for a household’s second earner to enter or re-enter the workforce. Since second earners in most OECD countries are usually women, the results demonstrate the importance of taking gender considerations into account as a key part of tax system design.

Taxing Wages 2016 shows that second earners’ average tax burdens are strongly influenced by certain tax design features, such as the use of dependent spouse tax provisions, whether tax credits, allowances or benefits are withdrawn on an individual or family basis and the choice between individual and family-based taxation.

The report points out that a dependent spouse tax allowance or tax credit – designed to lower the tax burden on the income of a primary earner who has a dependent or non-working spouse – tends to lower work incentives for second earners, as their partner loses this allowance or credit when the second earner enters or re-enters the workforce.  The same applies to the provision and withdrawal of benefits on a family basis.

Countries that use family-based, rather than individual-based taxation, often report higher tax wedges, and therefore lower work incentives for second earners. Under family-based taxation, the income of both partners in a couple is taxed jointly, while this income would be taxed separately under individual-based taxation.  This means that under family-based taxation, the second earner effectively pays tax at a higher part of the income tax rate schedule than they would under individual-based taxation, because the primary earner is already gaining the full benefit from the lower part of the tax rate schedule.

“High taxes on second earners discourage people, especially women, from working,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “Policymakers should make gender equity a key factor when designing tax systems. At the very least, more effort must be taken to ensure that tax system design does not exacerbate existing gender inequities.”

Key findings:

The average tax burden in the OECD remained unchanged in 2015

  • Across OECD countries, the average tax and social security burden on employment incomes remained at 35.9% for a second consecutive year in 2015.  This followed a rise totalling 0.9 percentage points between 2010 and 2014, reversing the decline from 36.0% to 35.0% between 2007 and 2010.
  • The highest average tax burdens for childless single workers earning the average national wage were in Belgium (55.3%), Austria (49.5%), Germany (49.4%) and Hungary (49.0%).  The lowest were in Chile (7%), New Zealand (17.6%) and Mexico (19.7%).
  • There was an increase of more than 0.4 percentage points in the ‘tax wedge’ in five countries – Australia, Luxembourg, Israel, Italy and Portugal. All of these countries had significant increases in PIT, not involving increases in statutory PIT rates, and two also had significant SSC increases.
  • A significant decline of one percentage point or more was experienced in three countries – Greece (-1.3 percentage points), Spain (-1.2 percentage points) and Estonia (-1 percentage point).    Another two countries – Ireland and the Netherlands – had decreases of more than 0.4 percentage points.  Of these five countries, three had significant SSC decreases and three had significant PIT decreases.

Tax burdens in families with children

  • The highest tax wedges for one-earner families with two children at the average wage were in France (40.5%) and Belgium (40.4%). Austria, Finland and Italy had tax wedges of between 39% and 40%. New Zealand had the smallest tax wedge for these families (4.9%), followed by Chile (7%), Ireland (9.5%) and Switzerland (9.8%). The average for OECD countries was 26.7%.
  • The largest increases in the tax burden for one-earner families with children were in Iceland (1.5 percentage points) and New Zealand (1.2 percentage points), and the largest fall was in Estonia (-4.4 percentage points) mainly due to increased cash benefits.
  • In all OECD countries except Mexico and Chile, the tax wedge for workers with children is lower than that for single workers without children.  The differences are particularly large in the Czech Republic, Germany, Ireland, Luxembourg and Slovenia.

Non-tax compulsory payments

  • In some countries a range of insurance-related benefits are provided through compulsory payments to privately-managed pension funds or insurance companies rather than through payments of social security contributions to government. More information on these “non-tax compulsory payments” is included in the OECD Tax Database.

Further information on Taxing Wages 2016 is available at: http://www.oecd.org/ctp/tax-policy/taxing-wages-20725124.htm.

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