Belgium, Germany and Hungary impose the highest taxes among OECD countries on the pay of a single person on average earnings, while Korea, Mexico and New Zealand take the least, according to the latest edition of the OECD’s annual publication Taxing Wages.

Source: OECD - - Focusing on the overall tax wedge, it is useful to note those countries where there have been the most significant changes. The most significant reductions, exceeding five percentage points, can be observed in five OECD member countries – Australia, France, Hungary, Ireland and the Slovak Republic. The largest decline is observed in Ireland where single parents have benefited from a reduction in the wedge of 10.8 percentage points. In this particular case, all Irish married couples and single parents enjoyed a significant reduction in the wedge, ranging from a reduction of 5 percentage points (two-earner married couple where the spouse is earning five-thirds of the average wage level) 10.8 percentage points (single parent). Also in Slovak Republic all married couples and single worker earning two-thirds of the average wage level enjoyed a reduction of more than five percentage points in the wedge.The reductions observed in Australia, France and Hungary have been focused nature as well. In Australia, single parents (–6.4 percentage points) and one-earner couples 6.7 percentage points) have enjoyed the most significant reductions. In France, the most significant reductions have affected single parents (–6.7 percentage points) and single workers earning two-thirds of the average wage level (–5.9 percentage points). In Hungary, single workers earning two-thirds of the average wage level are the most benefited from the reduction in the tax wedge (–5.6 percentage points).It is interesting to note that the tax wedge has decreased for all family types in almost half of the OECD member countries (Australia, Belgium, Canada, Denmark, Finland, Hungary, Italy, Luxembourg, the Netherlands, Portugal, the Slovak Republic, Sweden, Switzerland and the United States) while it has increased across all family types in seven countries (the Czech Republic, Japan, Korea, Mexico, Poland, Spain and Turkey). - - Over the time period in question, the personal income tax burden has decreased for all family types in ten of the OECD member countries: Belgium, Canada, Denmark, Finland, Germany, Hungary, Ireland, Portugal, Sweden, and the United States. The most significant reductions affecting all of the family types are noted in Hungary with a range of – 9.9 percentage points (single parent) to –2.4 percentage points (single person earning five thirds of the average wage level).The only other OECD member country with reductions in the personal income tax exceeding five percentage points is the Slovak Republic, where one earner families benefited from a reduction of eight percentage points in the personal income burden. At the other extreme, the personal income tax burden has increased across all family types in five OECD member countries: Korea, Mexico, New Zealand, Spain and Switzerland. However, the changes have been very small in Korea (0.0-0.6 percentage point) and Switzerland (0.2-0.5 percentage point).

For a single-earner married couple with two children on average earnings, by contrast, Turkey, Sweden and Poland impose the biggest ‘tax wedge’, while Ireland, Iceland and the United States take the smallest slice in tax. 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.

In 2005, single individuals without children earning the average wage in services and manufacturing industries faced a tax wedge of 55.4% of the cost of their labour to their employers in Belgium, 51.8% in Germany and 50.5% in Hungary, compared with 17.3% in Korea, 18.2% in Mexico and 20.5% in New Zealand. The average for OECD countries was 37.3%. See Table 1.

Source: OECD - - Chart I.1 show the constituent components of the tax wedge for 2005 as percentage of labour costs. The portion of labour costs paid in personal income tax is less than five per cent in Korea (2.5 per cent) and Greece (4.3 per cent); whereas it exceeds 30 per cent in Denmark (30.2 per cent). The portion representing employee social security contributions also varies widely, ranging from zero per cent in Australia and New Zealand to over 19 per cent in the Netherlands and Poland. Employers pay 29.7 per cent of total labour costs in social security contributions (including payroll taxes where applicable) in France, 26.3 per cent in Hungary and 25.9 per cent in the Czech. In contrast, employers in New Zealand are not subject to these levies, while in Denmark employer contributions are negligible (0.5 per cent). As a percentage of labour costs, the total of employee and employer social security contributions exceed 25 per cent in half of the OECD countries. They exceed one-third of total labour costs in eight OECD countries: Austria, Belgium, the Czech Republic, France, Germany, Greece, Hungary and Poland.

For a one-earner married couple with two children on average earnings, the tax wedge ranged from 42.7% in Turkey, 42.4% in Sweden and 42.1% in Poland to 11.9% in the United States, 11% in Iceland and 8.1 % in Ireland. The average for OECD countries was 27.7%.

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.  

 
Tax wedges have shrunk over the past few years in most OECD countries, partly reflecting governments’ desire to get more people into work so as to offset the effects on output and prosperity of ageing populations. However, these tax cuts have been limited by the need to maintain sufficient government revenues. In 2000, the average tax wedge for single persons without children was 37.9%, with Belgium at the top end of the range, with 57.1%, and Korea and Mexico at the bottom end, with 16.4% and 16.8% respectively.

Some countries have focussed their tax wedge reductions on lower paid workers, as this is the group that often experiences particularly high unemployment rates. The reductions in the tax wedge for single workers earning two-thirds of the average wage have fallen particularly sharply since 2000 in France (47.4% to 41.4%), Hungary (48.5% to 42.9%) and the Slovak Republic (40.6% to 35.3%).

Copyright 2006 OECD