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OECD tax rates on labor income stabilize in 2015

Staff writer |
Taxes on labor 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.

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Taxing Wages 2016 report shows that while taxes on labor 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 labor 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 labor 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 labor 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.

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