The OECD’s annual compendium of tax data shows little change in levels of taxation on wage earners in different OECD countries, with Turkey, Poland and France levying the most on a single-earner married couple with two children on average earnings and Ireland, New Zealand and Iceland taking the least.

Indirect taxes in Ireland, sometimes termed stealth taxes, are amongst the highest in the 30-member country OECD, and the total Irish taxation burden has changed little since 1995.

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 2006 of 55.4% of the cost of their labour to their employers in Belgium, 52.5% in Germany and 51.0% in Hungary. In all three of these countries, the average employee take 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 15.0% in Mexico, 18.1% in Korea and 20.9% in New Zealand. The average for OECD countries was 37.5%.

For a one-earner married couple with two children on average earnings, by contrast, the tax wedge ranged from 42.8% in Turkey, 42.2% in Poland and 42.0% in France to 2.3% in Ireland, 2.6% in New Zealand and 10.4% in Iceland. The average for OECD countries was 27.5%.

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 2006, the average tax wedge for single persons without children fell in only 8 OECD countries while it rose in 18 OECD countries. Changes have been minimal in most cases, however. From 2005 to 2006, the tax wedge rose by more than one percentage point only in the Netherlands, due to a reform of the health insurance system, and Japan. It fell by more than one percentage point only in the Czech Republic. 

Just over two thirds of the OECD’s 30 member countries have statutory minimum wages, and in just over half of these countries minimum wages have risen slightly faster than average wage levels in recent years. (A significant exception is the U.S., where real earnings of workers earning the minimum wage have dropped significantly.) Social contributions and payroll taxes add, on average, around 18% to the cost of employing minimum-wage workers.

Source: OECD