Global Economy
Tax burden rising on workers in OECD countries; Irish tax wedge below average except for high income singles
By Michael Hennigan, Founder and Editor of Finfacts
May 12, 2011 - 7:03 AM

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The tax burden on workers in the mainly developed OECD rose in 2010 for the first time in years, according to a report released by the Paris-based think-tank on Wednesday.  The OECD said high income Irish singles are the only family type whose tax wedge is above the OECD average.

The report from the Organization for Economic Cooperation and Development, “Taxing Wages,” shows that the “tax wedge” - -  the average tax and social security burden on incomes - - rose last year in 22 of the OECD's 34 member countries. It was the first time that the overall burden had risen since the organisation began publishing such data a decade ago.

Taxing Wages shows that tax burdens rose in 22 of the 34 OECD countries. The Netherlands, Spain and Iceland were among the countries experiencing significant increases, while Denmark, Greece, Germany and Hungary were among those showing the biggest drops.

In respect of Ireland, the difference with the OECD average has widened as Ireland reduced the tax wedge considerably over the past 11 years. The report says this has been the case particulary for lone parents with 2 children and low earnings; their tax wedge declined by more than 25 percentage points and they now receive more in government transfers than the taxes they pay. The tax wedge is only lower for this type of household in Australia and New Zealand. High income singles are the only family type whose tax wedge is above the OECD average, but the difference is minimal.

The report separates the tax burden on employment which is paid by employers (in the form of social-security payments) and employees (as income tax and more social security). France and Germany have some of the most costly tax systems with people who earn the average wage taking home just over 50% of their total labour cost.

Real incomes for average-wages earners fell in 15 OECD countries. Lower earnings caused by the recession and subsequent inflation tend to have a much larger impact on incomes.

In 2010, Taxing Wages indicates that:

  • France, Belgium and Italy were the highest-tax countries for one-earner married couples with two children earning the average wage, with tax wedges of 42.1% in France, 39.6% in Belgium and 37.2% in Italy;

  • At the bottom end of the scale, New Zealand had the smallest tax wedge for one-earner married couples with 2 children earning the average wage (-1.1%), followed by Chile (6.2%), Switzerland (8.3%) and Luxembourg (11.2%). The average for OECD countries was 24.8%;

  • Belgium, France and Germany had the highest tax wedges for single workers without children on average wages, at 55.4%, 49.3% and 49.1% respectively, though the tax wedge decreased by nearly 2 percentage points in Germany in 2010;

  • At the other end of the scale, the tax wedge in Chile and Mexico for single workers without children on average wages was only 7% and 15.5%, respectively. In New Zealand, the figure was 16.9% and in Korea it was 19.8%. The average for OECD countries was 34.9%;

  • In Hungary, lower employer social security charges and especially income taxes led to a 6.7 percentage point reduction in the tax wedge for a single person on the average wage, while in Germany, a cut in income taxes led to a 1.8 percentage point reduction. In Denmark, lower income taxes and a new “green check” to compensate for increased environmental taxes have led to a 1.2 percentage point reduction in the tax wedge;

  • In the Netherlands, increased employee social security charges led to a 1.2 percentage point increase in the tax wedge. Higher income taxes resulted in a 1.4 percentage point increase in the tax wedge for single taxpayers at average earnings in Spain, while an increase in employer social security charges and income taxes in Iceland resulted in a 3.3 percentage point increase in the tax wedge;

  • Ireland increased income taxes and the health levy while it decreased child benefits. The impact of these reforms on the tax wedge has been partly offset by the decrease in the average wage (the impact of the latter is about -0.4 percentage points on average). Because of the progressivity of tax regimes, lower earnings mean that a smaller share is taken in tax. This was also the case in Greece, where the strong decrease in the average wage resulted in a decrease in the tax wedge for all families, despite of the increase in marginal income tax rates at higher income levels.

Australia, Chile, Iceland, Israel, Italy, Mexico, the Netherlands, Norway, Poland, the Slovak Republic and Switzerland put large additional burdens on employment costs through compulsory payments which are not regarded as tax, since they are not paid to government, but to privately-managed pension funds or insurance companies. Often, these are paid by the employer, but in Chile, Iceland, Israel, the Netherlands, Poland and Switzerland a large proportion is paid by employees. More information on these “non-tax compulsory payments” is included in the OECD Tax Database (www.oecd.org/ctp/taxdatabase).

This year’s Taxing Wages includes new analysis of tax burden changes comparing 2000 with 2009. On average across the OECD, tax burdens fell across all income levels, particularly due to personal income tax cuts; some countries have also decreased employer social security contributions. On average, tax cuts implemented over this period favour households with children most, and lower earners more than higher earners.

These trends were most marked in Australia, Ireland, New Zealand and Sweden. The biggest exceptions were Greece, Iceland, Japan, Korea and Mexico. The OECD finds that governments that had room for tax cuts over the past decade have generally sought to ensure that working families benefit, particularly those on lower pay and/ or with children. Notwithstanding the recession, there is no sign of this trend being reversed in 2010.

Further information on Taxing Wages, including key results, is available at www.oecd.org/ctp/taxingwages. This webpage includes a new “Information by Country” section which discusses the main trends for each OECD member country separately. These 34 country-specific webpages also include Special Feature graphs that provide information on the changes in tax burdens between 2000 and 2009.

The Paris based Organisation for Economic Cooperation and Development is a think-tank for 34 mainly developed countries. OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The European Commission takes part in the work of the OECD.


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