Executive Summary

The estimated amounts of tax and social security contributions (SSCs) paid on labour income by the average worker in Latin American and Caribbean (LAC) countries in 2013 was 21.7%. These payments are measured by the tax wedge which takes the total taxes and compulsory SSCs paid by employees and employers, less family benefits received as a proportion of the total labour costs for employers. This measure provides an analysis of the combined impact of these levies on net household income.

There are wide national variations in the tax wedge across LAC countries. The LAC countries covered by the Report range from 34.6% in Argentina and 32.2% in Brazil to 11% in Trinidad and Tobago and 10% in Honduras. Two other countries, Colombia and Uruguay had measures of 30% or more and one other, Guatemala had a tax wedge of less than 15%.

The average tax wedge in OECD countries was around two-thirds greater than in LAC countries (35.9% compared with 21.7%). This is mainly because the vast majority of the working population in the LAC region do not have to pay personal income tax (PIT) as their incomes are below the minimum PIT thresholds. Of the group of 20 LAC countries, it was only in Mexico that the average worker was liable for PIT. The LAC average tax wedge (21.7%) is comprised of the following components: PIT 0.3%; employee SSCs 7.7%; and employer SSCs 13.6%. The corresponding breakdown for the OECD average (35.9%) is: PIT 13.3%; employee SSCs 8.3%; and employee SSCs 14.3%.

LAC countries do not offer generous tax reductions or cash transfers for households with children at the average earnings level, which results in only small variations between the tax wedges of workers with children as compared to workers without children. The tax wedge for the average one-earner married couple with two children in the LAC group was only 0.3% percentage points less than for the single worker at 21.4%. The corresponding difference for OECD countries where such benefits are substantially higher was 9.5 percentage points. Family allowance schemes existed in only 5 of the 20 LAC countries – Argentina, Brazil, Chile, Colombia and Uruguay – and these are not available at the average wage level in Chile.

This new Report provides, for the first time, internationally comparable data on taxes and SSCs paid on labour income for the group of 20 LAC countries. It is a joint publication by the Inter-American Development Bank (IDB), the Inter-American Center of Tax Administrations (CIAT), and the OECD. Using a similar methodology to the OECD Taxing Wages database, it presents cross-country comparisons between LAC economies and OECD economies. The LAC countries covered are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, Trinidad and Tobago, Uruguay and Venezuela. The tax wedge figures for Chile and Mexico in this Report are different from the figures presented in the corresponding OECD Taxing Wages publication as they include the impact of all compulsory SSCs paid by employees and employers – both to the public and private sector – whereas OECD Taxing Wages only counts those contributions paid to the public sector as taxes.

The Report also contains a special feature which explores some of the relationships existing in LAC countries between taxes on wages (specifically SSCs), characteristics of labour markets and levels of labour informality. The analysis makes estimates of the formalisation costs – proxied by social contributions – that workers across the whole of the income distribution would have to pay to join or remain in the formal sector. There is some evidence that high rates of informality are correlated with high theoretical formalisation costs, especially for those at the lower end and in the low-middle range of the income distribution. This adds to the many other non-tax factors that explain decisions to work or remain in the informal labour market. The interaction between lower earnings thresholds of SSCs (generally minimum wages) and social security program contribution rates increases the costs of adhering to social programs for those with earnings in the lower and middle-income deciles while the cost of formal labour market participation as a percentage of earnings decreases for those in the upper half of the earnings distribution.

Other key findings:

  • The estimated average personal tax rate in LAC countries was 9.3% of gross wage earnings in 2013. The great majority, 8.9%, of earnings comprised payments of employee SSCs with the remaining 0.4% being PIT. The corresponding figures for OECD economies were a personal tax rate of 25.4% of gross wage earnings, 9.9% being employee SSCs and 15.5% being PIT. This highlights the difference in the capacity of PIT to generate tax revenues from labour earnings in the OECD compared with LAC countries.

  • The average tax wedge for the single worker without children ranged from 10.8% of total labour costs in the first income decile to 25.9% in the tenth decile. The corresponding figures for a one-earner married couple with two children were 7.1% and 25.7%.

  • In the first income decile, a single individual without children paid an average of 3.9% of gross earnings in PIT and employee SSCs compared with 15.0% in the tenth decile. A one-earner married couple with two children, on average received 0.5% of gross earnings at the first income decile and paid 14.8% at the tenth decile.

  • Total average annual labour costs including employer SSCs in the region expressed in USD in Purchasing Power Parities totalled USD 16 125 in 2013, the corresponding figures for the average wage and the net income after taxes that workers take home after PIT and SSCs being USD 13 771 and USD 12 347 respectively.

  • Measures of the after-tax income elasticity show that on average tax systems on labour for average earners in LAC countries tend to be proportional, in contrast with OECD tax systems which tend to be much more progressive. For a single worker without children, LAC tax systems start to exhibit slight progressivity around the eighth income decile as workers in some countries start to pay PIT. Whereas for a one-earner married couple with two children, the average tax system is slightly progressive at lower levels of income, then becomes proportional in the middle-income deciles before matching the single worker without children at the upper deciles of the income distribution.