OECD Reports A Rise In Earnings Taxation

by Jason Gorringe, Tax-News.com, London

11 March 2005

According to the latest edition of the OECD's annual Taxing Wages, published this week, the 'tax wedge' on earnings rose in more than half of the OECD's 30 member states in 2004, with more countries showing increases than decreases. The 'tax wedge' is the share of total labour costs taken by the state in income tax plus employer and employee social security contributions, minus any cash benefits paid.

During 2004, 18 countries showed an increase in the tax wedge for a single person earning the average wage of a production-line employee during 2004, while 11 countries showed a reduction and one was unchanged. For a single parent with two children earning two-thirds of the average wage, tax wedges were higher in 15 countries, lower in 12 and unchanged in three. For a one-earner married couple with two children earning the full average wage, 17 countries took a higher tax wedge, 12 had a lower wedge and one was unchanged.

Overall, the increase amounted to only a few tenths of a percent, put down to a range of factors, including buoyant wage growth and the resulting fiscal drag as increased earnings pushed employees into higher tax brackets, as well as changes in tax policy. At a time when many governments are reducing taxes on corporate profits and capital, the OECDE says the figures serve as a reminder of the dampening effect of taxation on incentives for individuals to work and for employers to provide jobs.

"There has been a trend since 1996 towards a reduction (in the tax wedge) driven by concern about the effect of these taxes on employment," said Christopher Heady, head of tax policy and statistics at the OECD. "The reason it has stopped is that it is getting rather expensive to keep on cutting taxes."

For a single person with average earnings, the net tax burden (income tax and employee social security contributions, less cash benefits) was highest in Denmark at 41.2% of earnings, followed by Germany and Belgium at 40.5%, and lowest in Mexico (4.5%) and Korea (9.3%). A single-earner married couple on average wages with two children, by contrast, faced a net tax burden of only 29.4% in Denmark, 18.1% in Germany and 16.4% in Belgium. Single-earner married couples on average wages with two children in Ireland and Luxembourg actually received more money in cash transfers from the state than they paid out in income tax and social security contributions, and in neither of these countries were higher effective marginal tax rates a disincentive to such families to seek to earn more.

For a single employee on average production wages, tax wedges in 2004 ranged from a high of 54.2% of total labour costs in Belgium to a low of 15.4% in Mexico. This means that the costs to employers of taking on new workers in Belgium is more than twice the workers' take-home pay.

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