Tax Burdens On The Increase, Says OECD

by Ulrika Lomas, Tax-News.com, Brussels

13 May 2011

Average tax burdens rose in 22 of the Organization for Economic Co-operation and Development's (OECD) 34 member countries in 2010, with France, Belgium, Germany and Italy among the highest-taxed countries.

The OECD's annual Taxing Wages publication, released on May 11, notes that this represents the reversal of a trend toward declining tax burdens, seen in previous years. The Netherlands, Spain and Iceland are highlighted as those countries where significant increases were experienced, whereas, on the other hand, Denmark, Greece, Germany and Hungary recorded large drops.

The document focuses on the taxation of employment income across OECD countries and on the distribution of this tax burden across different household types and levels of earnings. Each year, the OECD calculates the difference between the total cost to an employer of employing an individual and that person’s net take-home pay, including those family benefits generally available to households. A "tax wedge" is worked out as being the total taxes paid by employees and employers, net of cash transfers received, divided by the employer’s total payroll costs.

The report then breaks down its findings into categories based upon particular familial scenarios.

For instance, the report lists countries in terms of the tax burden felt by one-earner married couples with two children earning the average wage. Based upon these calculations, the OECD found the following:

• France, Belgium and Italy were the highest-taxed countries for families in this bracket. Their respective tax wedges were 42.1%, 39.6%, and 37.2%.
• In contrast, New Zealand recorded the smallest tax wedge for this category, with -1.1%. There was a small gap between New Zealand and the next country on the list, with Chile showing a 6.2% wedge. Switzerland followed with 8.3%, and Luxembourg with 11.2%.

The average tax wedge for OECD countries in this scenario was 24.8%.

Next, based upon calculations for single workers without children on average wages, the report shows that:

• Belgium and France again topped the list, with Germany replacing Italy in the top three highest-tax countries. Belgium had the greatest wedge, at 55.4%, France following closely with 49.3%, and Germany with 49.1%, inspite of its own 2% fall;
• Chile and Mexico provided the smallest wedges, with 7% and 15.5% respectively. New Zealand and Korea rounded out the bottom four, with 16.9% and 19.8%.

The average country wedge for this category was considerably higher, at 34.9%.

Going into further detail, the report looks at the most substantial changes which took place in 2010. Decreases in the tax wedge were noted in several countries. In Hungary, a combination of lower employer social security charges and, in particular, reduced income taxes led to a 6.7% 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% fall. In Denmark, lower income taxes and a new “green check” to compensate for increased environmental taxes led to a 1.2% drop in the tax wedge.

On the other hand, in the Netherlands, increased employee social security charges led to a 1.2% increase in the tax wedge. Higher income taxes resulted in a 1.4% wedge rise for single taxpayers at average earnings in Spain, while Iceland saw a 3.3% increase, accounted for by hiked employer social security charges and income taxes.

In Ireland's case, the report notes that increased income and health taxes were introduced alongside decreases in child benefits. The impact of these reforms on the tax wedge was partly offset by the decrease in the average wage, and, because of what the OECD calls 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 saw 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.

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