The average share of taxes and social security payments as a proportion of
total labour costs among member states of the Organisation for Economic Cooperation
and Development (OECD) fell slightly at most earnings levels between 2000 and
2006, according to a new report.
The latest edition of OECD's annual 'Taxing Wages' report found that 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.
However, wage-earners in some other OECD countries, including
Greece, Iceland, Korea and Mexico, have ended up with higher tax bills due to
so-called fiscal drag - the process whereby pay increases push taxpayers into
higher tax brackets and in some cases erode reliefs.
The OECD reported that 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%.
During the period under review, the report observed that 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.
The report also found that, 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, it claimed.
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, the OECD concluded.
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 US, taxpayers in higher income
brackets saw their tax burden drop by around 1.6%, and 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.
The Taxing Wages study compares countries according to the taxes that 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%.
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%.
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