Families with children have paid less in tax as a percentage of their income in recent years in Australia, Hungary, Ireland and New Zealand, thanks to family-friendly tax policies, but wage-earners in some other OECD countries, including Greece, Iceland, Korea and Mexico, have wound up with higher tax bills due to so-called fiscal drag.
On average across OECD countries, the share of taxes and social security payments as a proportion of total labour costs fell slightly at most earnings levels between 2000 and 2006, according to the latest edition of OECD’s annual Taxing Wages. But wage-earners in some countries still found themselves paying the same or more in taxes, as pay increases pushed them into new tax brackets where higher rates are charged or because tax reliefs, such as those related to children, have eroded in value.
In many OECD countries, average full-time earnings rose considerably between 2000 and 2006, the most recent year for which comparative figures are available, with nine countries - the Czech Republic, Greece, Hungary, Iceland, Korea, Mexico, Portugal, the Slovak Republic and Turkey - showing nominal increases of more than 40%. In countries where tax rates go up by steps as taxable income rises, pay rises to reflect inflation can lead to higher taxes – a phenomenon known as fiscal drag -- unless tax bands are adjusted to compensate.
During the period under review, while many countries cut headline tax rates or introduced more generous tax concessions, such moves often failed to reduce individual earners’ tax bills in any significant way. The fiscal drag effect was especially strong in countries whose tax rates rose sharply as earnings increased or where earnings growth was above-average.
Across OECD countries, tax changes have tended to favour low-wage earners. But in a few countries - Australia, Canada, Germany, Iceland, Korea, Luxembourg, Norway and the United States - tax reforms have mainly benefited higher-income groups. In addition, low wage-earners can find themselves paying higher taxes if targeted tax concessions such as employment-conditional benefits or tax credits are not adjusted to take account of inflation. Where such tax reliefs exist, fiscal drag can erode their value, with particularly strong effects on low-wage earners.
In Germany, for example, there was little or no change between 2000 and 2006 in the tax burden for unmarried taxpayers at average or less-than-average earnings, in spite of changes in tax legislation. In the U.S., taxpayers in higher income brackets saw their tax burden drop by around 1.6 percentage points, those on average or below-average earnings saw little change, while in Greece, Mexico and Korea the tax burden for almost all taxpayers increased in spite of tax reforms during the period under review (see Table 1).
Taxing Wages compares countries according to what they levy in the form of a so-called ‘tax wedge’, calculated as 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.
Belgium, Hungary and Germany imposed the highest tax wedges – including income taxes and social security charges -- among OECD countries on a single person employed at average earnings levels in 2007, while Mexico, Korea and New Zealand took the least. For a single-earner married couple with two children on average earnings, Hungary, Turkey and Greece charged the most, while New Zealand and Iceland took the least along with Ireland – which actually paid a bonus, thanks to generous benefits, over and above the cost of employment to the employer.
In 2007, single individuals without children earning the average wage in services and manufacturing industries faced a tax wedge of 55.5% of the cost of their labour to their employers in Belgium, 54.4% in Hungary and 52.2% in Germany, compared with 15.3% in Mexico, 19.6% in Korea and 21.5% in New Zealand. The average for OECD countries was 37.7% (see Table 2).
For a single-earner married couple with two children on average earnings, the tax wedge ranged from 43.8% in Hungary, 42.7% in Turkey and 42.6% in Greece to -1.1% in Ireland, 2.8% in New Zealand and 11.4% in Iceland. The average for OECD countries was 27.3% (see Table 3).
The 30 member countries of the OECD (Organisation for Economic Cooperation and Development, which functions as a government think-tank) are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.
