Personal income tax has risen in 25 out of 34 OECD countries over the past three years, as countries reduce the value of tax-free allowances and tax credits and subject higher proportions of earnings to tax, according to new data in the annual Taxing Wages publication.
The increases in tax burdens on labour income in 2013 were largest in Portugal (due to higher statutory rates), the Slovak Republic (due to higher employer social security contributions) and the United States (due to expiry of previous reductions in employee social security contributions).
The average tax burden on employment incomes across the OECD increased by 0.2 of a percentage point in 2013, to 35.9 percent, according to the report. It increased in 21 out of 34 countries, fell in 12, and remained unchanged in one.
The 2013 rise follows a substantial increase in 2011 and a smaller one in 2012. Since 2010, the tax burden has increased in 21 OECD countries and fallen in 9, partially reversing the reductions seen between 2007 and 2010.
The new findings on income tax burdens are among the highlights of Taxing Wages 2014, which provides unique cross-country comparative data on income tax paid by employees as well as the associated social security contributions made by employees and employers; both are key factors when individuals consider their employment options and businesses make hiring decisions.
A special chapter of the report assesses how progressivity of tax systems in OECD countries – the role income taxes play to achieve a more equal distribution of income after tax than before – has changed since 2000.
The design and interaction of personal income tax systems, social security contributions and benefit systems is shown to have become more progressive for low-income households across the OECD, particularly since the global economic crisis began in 2007, and notably for poorer households with children. This is principally attributed to growth in targeted tax credits or “make-work-pay” provisions for low-income workers, as well as increased child benefits for low-income households.
Conversely, there has been little change in progressiveness of taxation for single workers without children or those at higher income levels, although wide differences exist between countries.
Ireland, Sweden and Slovenia report the greatest rise in progressive taxation for single taxpayers without children, while the largest decreases in progressivity for single taxpayers without children were seen in Germany, Hungary and Israel.
The tax and social security contribution burden is measured by the ‘tax wedge as a percentage of total labour costs’ – or the total taxes paid by employees and employers, minus family benefits received, divided by the total labour costs of the employer. Taxing Wages also breaks down the tax burden between personal income taxes, including tax credits, and employee and employer social security contributions.
Other key findings in the report:
The highest average tax burdens for childless single workers earning the average wage in their country were observed in Belgium (55.8%), Germany (49.3%), Austria (49.1%) and Hungary (49.0%). The lowest were in Chile (7%), New Zealand (16.9%) and Mexico (19.2%). (see Table 1)
The average tax burden for those earning the average wage has increased by a 0.8 percentage points between 2010 and 2013 to reach 35.9 per cent (see Table 2) following a decline from 36.1 to 35.1 per cent between 2007 and 2010.
Personal income tax was the main contributor to the 2013 increase in the average OECD total tax wedge with increases as percentage of total labour costs in 20 countries. The largest increases were in Portugal (+3.5 percentage points) due to higher statutory tax rates and Luxembourg (+1.1) due to a frozen income tax schedule.
Reductions in employer SSCs and PIT were key factors in those countries where the tax level fell in 2013. The largest decreases in the tax burden were in the Netherlands (-1.8 percentage points), Greece (-1.4) and France (-1.2). In France, a tax credit for competitiveness and employment was introduced, which reduced the burden of employer SSCs by 1.9 percentage points.
The highest tax wedges for one-earner/two children families at the average wage were in Greece (44.5%), France (41.6%), Belgium (41.0%) and Austria (38.4%). New Zealand had the smallest tax wedge for these families (2.4%), followed by Ireland (6.8%), Chile (7%), and Switzerland (9.5%). The average for OECD countries was 26.4%. (see Table 3).
The largest increases in the tax burden for one earner families with children were in New Zealand and Portugal (both +1.9 percentage points) and the Slovak Republic (+1.8). The largest falls were in France and the Netherlands (-1.5 percentage points).
In all OECD countries except Mexico and Chile, the tax wedge for families with children is lower than that for single individuals without children. The differences are particularly large in the Czech Republic, Luxembourg, Germany, Ireland and Slovenia.
Non-tax compulsory payments
In some countries a range of insurance-related benefits are provided through compulsory payments to privately-managed pension funds or insurance companies rather than through payments of SSCs to government. More information on these “non-tax compulsory payments” is included in the OECD Tax Database.