Tax burdens on wages rising even without tax rate increases
The new report Taxing Wages 2015 says the tax burden has increased in 23 OECD countries and fallen in 10 during this period.
Most of the increased tax resulted from wages has resulted from wages rising faster than tax allowances and credits. In 2014, only seven countries had higher statutory income tax rates for workers on average earnings than in 2010, and in six countries they were lower.
In 2014, the tax burden on the average worker across the OECD increased by 0.1 of a percentage point to 36%, even though no OECD country increased its statutory income tax rates on the average worker. The tax burden increased in 23 of the 34 OECD countries, fell in nine and remained unchanged in two.
The highest average tax burdens for childless single workers earning the average wage in their country were observed in Belgium (55.6%), Austria (49.4%), Germany (49.3%) and Hungary (49.0%). The lowest were in Chile (7%), New Zealand (17.2%), Mexico (19.5%) and Israel (20.5%).
Across OECD countries the average tax and social security burden on employment incomes increased by 0.1 of a percentage point to 36.0% in 2014. This followed rises of 0.2, 0.1 and 0.5 percentage points in the three years since 2010. These rises reversed the decline from 36.1% to 35.1% between 2007 and 2010.
Personal income taxes were the main contributor to an increasing total tax wedge in 18 of the 23 countries with an increase. The largest increase was in Ireland (+1.1 percentage points) where a higher proportion of earnings was subject to tax as the statutory tax rates, thresholds and basic tax credit amounts remained unchanged since 2011.
Personal income taxes and employer social security contributions were the primary factors in countries where the tax wedge fell. The only country with a decline of more than one percentage point was Greece (-1.2 percentage points) due to decreasing employer social security contributions (-0.9 percentage points). The overall employer social security contribution rate was reduced from 27.46% to 24.56% from July 2014.
The highest tax wedges for one-earner families with two children at the average wage were in Greece (43.4%), Belgium (40.6%) and France (40.5%). New Zealand had the smallest tax wedge for these families (3.8%), followed by Chile (7%), Switzerland (9.8%) and Ireland (9.9%). The average for OECD countries was 26.9%.
Due to reduced family income supplement and frozen basic family benefit payments, Ireland saw the largest increase in the tax burden for one earner families with children (+1.5 percentage points) compared with a 1.1 percentage points increase for the single average worker.
In all OECD countries except Chile, Greece and Mexico, 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.
The tax wedge figures for the single average worker in 2013 were between 33% and 34% in Brazil and China (where the modelling focuses on Shanghai); slightly below the OECD average of 35.9%. The corresponding averages in India, Indonesia and South Africa, ranging from zero to 14.3%, were low compared with the vast majority of OECD countries.
In Brazil, China, India and Indonesia, the average worker pays little or no income tax and the employer social security contributions component forms 70% to 80% of the tax wedge. In South Africa, the picture is different, where personal income tax as a percentage of total labour costs (11.4%) is just 2 percentage points below the OECD average and comprises around 80% of the total tax wedge.
In contrast with the OECD average, the presence of children has little or no effect on the tax burden in these non-OECD countries. In most cases, working families with children face the same tax wedge as their childless counterparts. The exception is Brazil, where the second earner with 33% of the average wage receives the “salário família”, reducing the tax wedge slightly. ■