Chapter 3. 2018 tax burdens

The 2018 tax burden results based on the eight model household types are presented in Tables 3.1 to 3.13 and Figures 3.1 to 3.7. The model household types vary by marital status, number of children and economic status: single taxpayers, without children, earning 67%, 100% and 167% of the average wage (AW); a single parent, with two children, earning 67% of the AW; a single earner couple at the AW level with two children; two-earner couples at 133% and 167% of the AW with two children; and a two-earner couple, without children, at 133% of the AW.

The chapter presents different measures for the average tax burdens (tax wedge, personal tax rate, net personal tax rate, personal income tax rate and employee social security contribution rate) and marginal rates (tax wedge and net personal tax rate). The results for two measures of tax progressivity are also considered: tax elasticity on gross earnings and labour costs.

    

Average tax burdens

Table 3.11 and Figure 3.1 show the average tax wedge (combined burden of income tax, employee and employer social security contributions) taking into account the amount of cash benefits each specific household type is entitled to. Total taxes due minus transfers received are expressed as a percentage of labour costs, defined as gross wage plus employers’ social security contributions (including payroll taxes). In the case of a single person on average wage the tax wedge ranges from 7.0% (Chile) and 18.4% (New Zealand) to 49.5% (Germany) and 52.7% (Belgium). For a one-earner married couple, with two children, at the same wage level the tax wedge is lowest in New Zealand (1.9%) and Chile (7.0%) and highest in Italy (39.1%) and France (39.4%). As stated in Chapter 1, the tax wedge tends to be lower for a married couple, with two-children, at this wage level than for a single individual without children due to both receipt of cash benefits and/or more advantageous tax treatment. It is also interesting to note that the tax wedge for a single parent, with two children, earning 67% of the average wage is negative in New Zealand (-20.5%), Canada (-15.2%), and Poland (-12.0%). This is due to the amount of cash benefits received by these families plus any applicable non-wastable tax credits that exceed the sum of the total tax and social security contributions that are due.

Table 3.2 and Figure 3.2 present the combined burden of the personal income tax and employee social security contributions, expressed as a percentage of gross wage earnings (the corresponding measures for income tax and employee contributions separately are shown in Tables 3.4 and 3.5). A single person at the average wage level without children has the highest average tax plus contributions burden in Belgium (39.8%). The lowest average rates were in Chile (7.0%), Mexico (10.2%), Korea (14.9%), Estonia (15.0%), Switzerland (17.4%), Israel (18.1%) and New Zealand (18.4%).

Table 3.3 shows the combined burden of income tax and employee social security contributions, reduced by the entitlement to cash benefits, for each household type. Figure 3.3 illustrates this burden for single individuals without children and one-earner married couples with two children, with both household types on average earnings. Comparing Table 3.2 and Table 3.3, the average tax rates for families with children (columns 4 -7) are lower in Table 3.3because most OECD countries support families with children through cash benefits.

A lower burden is also observed for a single individual, without children, at 67% of the average wage in Canada because of a cash transfer paid to mitigate the burden imposed by the federal consumption tax (i.e. the Goods and Services Tax Credit; further details can be found in the country chapter contained in Part II of this Report). The same is true in Denmark for single taxpayers at 67% and 100% of the average wage and two-earner married couples, without children, at 133% of the average wage who receive a Green Check to compensate for increased environmental taxes.

Comparing Table 3.2 and Table 3.3, for single parents, with two children, earning 67% of the average wage, 30 countries provide cash benefits. In Poland, Canada and New Zealand these represent respectively 47.2%, 38.6% and 35.6% of income and they are at least 25% of income in Denmark (27.0%). 29 countries provide benefits for a one-earner married couple, with two children, earning the average wage level, although these are less generous relative to income, ranging up to 16.5% (Canada and New Zealand). The lower level of cash benefits for the married couple can be attributed to three reasons: single parents may be eligible for more generous treatment; the benefits themselves may be fixed in absolute amount; or the benefits may be subject to income testing.

Table 3.4 shows personal income tax due as a percentage of gross wage earnings. For single persons, without children, at the average wage (column 2) – the income tax burden varies between 0,01% (Chile) and 35.8% (Denmark). In most OECD member countries, at the average wage level, the income tax burden for one-earner married couples with two children is lower than that faced by single persons (compare columns 2 and 5). These differences are clearly illustrated in Figure 3.4. In nine OECD countries, the income tax burden faced by a one-earner married couple with two children is less than half that faced by a single individual (Germany, Hungary, Luxembourg, Poland, Portugal, the Slovak Republic, Slovenia, Switzerland and the United States). In contrast, there is no difference in eight countries – Australia, Finland, Israel, Lithuania, Mexico, New Zealand, Norway and Sweden. In Chile, the one-earner married couple at the AW level with children did not pay personal income tax.

There is only one OECD member country where a married average worker with two children has a negative personal income tax burden. This is due to the presence of non-wastable tax credits, whereby credits are paid in excess of the taxes otherwise due. This results in tax burdens of -5.1% in the Czech Republic. Similarly, single parents, with two children, earning 67% of the average wage show a negative tax burden in six countries – the Czech Republic, Germany, Israel, Poland, Spain and the United States. In two other countries – Chile and Hungary – this household type pays no income tax.

A comparison of columns 5 and 6 in Table 3.4 demonstrates that if the second spouse has a job which pays 33% of the average wage, the income tax burden of the household (now expressed as 133% of the average wage) is slightly higher in seventeen countries, the largest differences being in the Czech Republic (6.2 percentage points) and Germany (5.6 percentage points). At the same time, the income tax burden is lower in eighteen countries, the largest differences being in Finland (-5.0 percentage points), Australia (-4.3 percentage points) and the Netherlands (-4.0 percentage points). There is no impact on the tax burden in Chile.

An important consideration in the design of an income tax is the level of progressivity - the rate at which the income tax burden increases with income. A comparison of columns 1 to 3 in Table 3.4 provides an insight into the levels of progressivity in the income tax systems of OECD countries. Comparing the income tax burden of single individuals at the average wage level with their counterparts at 167% of the average wage (columns 2 and 3), the lower paid worker faces a lower tax burden in all countries except in Hungary. There, a flat tax rate is applied on labour income and all households without children pay the same percentage of income tax. The same is true for single individuals at 67% of the average wage level compared with their counterparts at the average wage level. Finally the burden faced by single individuals at 67% of the average wage level represents 25% or less of the burden faced by their counterparts at 167% in four OECD countries: Chile (0%), Mexico and the Netherlands (both 24%) and Korea (25%).

The addition of social security contributions to the average tax rate reduces this progressivity as well as the proportional tax savings (i.e. tax savings of the low income workers relative to the higher income workers). When comparing Table 3.2 with Table 3.4, the OECD personal average tax burden of single individuals at 67% of the average wage level is only 32% lower than their counterparts at 167% compared to the OECD average tax savings of 47% for personal income taxes alone. The OECD average tax savings observed for one-earner married couples with two children at the average wage level relative to the average single workers falls from 34% to 21%. These lower figures reflect that there is little variation between social security contribution rates across household types, as shown in Table 3.5.

Table 3.5 shows employee social security contributions as a percentage of gross wage earnings. For a single worker without children at the average wage (column 2) the contribution rate varies between zero (Australia, Denmark and New Zealand) and 22.1% (Slovenia). Australia, Denmark and New Zealand do not levy any employee social security contributions paid to general government and there are three other countries with very low rates - Iceland (0.3%), Mexico (1.4%) and Estonia (1.6%). Social security contributions are usually levied at a flat rate on all earnings, i.e. without any exempt threshold. In a number of OECD member countries a ceiling applies. However, this ceiling usually applies to wage levels higher than 167% of the average wage. The flat rates result in a constant average burden of employee social security contributions for most countries between 33% and 167% of average wage earnings. Constant proportional burden for employee social security contributions for over the eight model household types, is observed in (in decreasing order of rates) Slovenia (22.1%), Poland (17.8%), Greece (16.0%), Turkey (15.0%), the Czech Republic, Latvia and Portugal (all 11.0%), Finland (9.8%), Lithuania (9.0%), Norway (8.2%), the United States (7.7%), Chile (7.0%), Spain (6.4%), Switzerland (6.2%) and Estonia (1.6%).

In addition, at the average wage level only Germany and the Netherlands impose different burdens of social security contributions on employees according to their family status (see Figure 3.5).

Marginal tax burdens

Table 3.6 and Figure 3.6 show the percentage of the marginal increase in labour costs that is deducted through the combined effect of increasing personal income tax, employee and employer (including payroll taxes) social security contributions and decreasing cash transfers. It is assumed that the gross earnings of the principal earner rise by 1 currency unit. This is the marginal tax wedge. In most cases, it absorbs 25% to 55% of an increase in labour costs for single individuals on average wage without children. However, in seven OECD countries these individuals face higher marginal wedges – Belgium (65.1%), Italy (61.7%), Germany (60.2%), Austria (59.6%), France (58.4%), Luxembourg (57.1%) and Finland (55.4%). Mexico (23.4%) and Chile (10.2%) have the lowest marginal tax wedge.

In twenty-six OECD member countries, the marginal tax wedge for one-earner married couples at average earnings with two children is either the same or within 5 percentage points as that for single persons at average wage earnings with no children. The marginal tax wedge is more than 5 percentage points lower for one-earner married couples in six countries: Luxembourg (17.5 percentage points), France (16.1 percentage points), United States (9.3 percentage points), Germany (7.9 percentage points), Slovenia and Switzerland (both 7.4 percentage points). In contrast, the marginal rate for one-earner married couples with two children is more than 5 percentage points higher than it is for single workers, with no children, in Canada (36.1 percentage points), New Zealand (25.0 percentage points), Iceland (9.0 percentage points) and the Netherlands (5.7 percentage points). These higher marginal rates arise because of the phase out of income-tested tax reliefs and/or cash benefits. When an income-tested measure is being phased out, the reduction in the relief or benefit compounds the increase in the tax payable. These programmes are set out in greater detail in the relevant country chapters in Part II of the Report.

Table 3.7 and Figure 3.7 show the incremental change to personal income tax and employee social security contributions less cash benefits when gross wage earnings increase at the margin (it is assumed that the gross earnings of the principal earner rise by 1 currency unit). As in the case of the tax wedge, in most cases personal income tax and employee social security contributions absorb 25% to 55% of a worker’s pay rise for single individuals without children at the average wage level. The marginal tax rate for the average worker is higher than 55% only in Belgium (55.6%) and lower than 25% only in Chile (10.2%), Mexico (17.6%) and Korea (22.8%).

In twenty-five OECD member countries, the net marginal personal tax rate for one-earner married couples with two children at the average wage level is either the same or within 5 percentage points as that for single persons with no children. The marginal rate is more than 5 percentage points lower for the one-earner married couples in seven countries: France (22.0 percentage points), Luxembourg (20.0 percentage points), the United States (10.0 percentage points), Germany (9.5 percentage points), Slovenia (8.6 percentage points), Switzerland (7.9 percentage points), and Portugal (5.5 percentage points). In contrast, the marginal rate for one-earner married couples with two children is more than 5 percentage points higher than it is for single persons with no children in Canada (39.4 percentage points), New Zealand (25.0 percentage points), Iceland (9.6 percentage points) and the Netherlands (6.4 percentage points). Similar to the marginal tax wedges, these higher marginal rates arise because of the phase out of income-tested tax reliefs and/or cash transfers.

Table 3.8 shows the percentage increase in net income relative to the percentage increase in gross wages when the latter increases by 1 currency unit, i.e. the elasticity of after-tax income.2 Under a proportional tax system, net income would increase by the same percentage as the increase in gross earnings, in which case the elasticity is equal to 1. The more progressive the system is – at the income level considered – the lower this elasticity will be. In the case of the one-earner married couples, with two children, at the average wage, column 5 of Table 3.8 shows that Canada (0.28), New Zealand (0.46), Belgium and Ireland (both 0.56) have, on this measure, the most progressive systems of income tax plus employee social security contributions taking into account tax provisions and cash transfers for children at this income level. In contrast, Chile (1.00), France (0.95) and Mexico (0.92) either implement or are close to a proportional system of income tax plus employee social security contributions – at least for this household type.

It is interesting to note that the elasticity exceeds one for a single individual at 167% of the average earnings in Austria (1.02), indicating that the income tax system at this point in the income scale is regressive. In other words, a percentage increase in gross pay leads to an increase in net income in excess of the percentage increase in gross wage earnings.

Table 3.9 provides a different elasticity measure: the percentage increase in net income relative to the percentage increase in labour costs (i.e. gross wage earnings plus employer social security contributions and payroll taxes) when the latter rises by 1 currency unit.3 In this case, taxes and social security contributions paid by employers are also part of the analysis. In half of the OECD member countries the value of this elasticity lies between 0.5 and 0.97 for the eight selected household types. This elasticity is below 0.5 for single parents earning 67% of the average wage level in Belgium (0.47), Australia and Canada (both 0.42), Slovenia (0.41), France (0.36), Ireland (0.27), the United Kingdom (0.26) and Poland (0.03) and for one-earner married couples at the average wage level with two children in New Zealand (0.46) and Canada (0.28). In contrast, the elasticity is between 0.98 and 1.0 for most of the household types in Chile and some household types in Hungary, Japan, Mexico and Poland, and one household type in Estonia, Latvia and Lithuania for the single worker earning 167% of the average wage (all 1.00). Under this elasticity measure the income tax system is regressive for a single individual at 167% of the average wage in Germany (1.14) and Austria (1.20).

Table 3.10 and Table 3.11 set out figures for gross wage earnings and net income for the eight household types after all amounts have been converted into U.S. dollars with the same purchasing power. Single workers with the average wage take home (see Table 3.10, column 4) over USD 40 000 in thirteen countries: Switzerland (USD 63 909), Luxembourg (USD 48 456), Korea (USD 48 045), Iceland (USD 47 410), the Netherlands (USD 45 364), Australia (USD 45 066), Ireland (USD 44 709), the United Kingdom (USD 43 733), the United States (USD 41889), Norway (USD 41 459), Austria (USD 40 813), Germany (USD 40 547) and Japan (USD 40 266). The corresponding lowest levels were in Mexico (USD 11 743), Latvia (USD 17 149), the Slovak Republic (USD 19 148), Lithuania (USD 19 247) and Hungary (USD 19 796). In the case of a one-earner married couple with two children at the average earnings level (see Table 3.11), families take home over USD 50 000 in Germany, Iceland, Ireland, Luxembourg and Switzerland; with the lowest level again being in Mexico. With the exceptions of Chile and Mexico, the one-earner married couple takes home more than the single individual, both household types at the average wage level, due to the favourable tax treatment of this household and/or the cash transfers to which they are entitled.

Table 3.12 and Table 3.13 show the corresponding figures to Table 3.10 and Table 3.11 for labour costs and net income. Thus, the ‘net’ columns in Table 3.10 and Table 3.11 are identical to those in Table 3.12 and Table 3.13, respectively. Usually, labour costs are much higher than gross wages, because any employer social security contributions (including payroll taxes) are taken into account. If measured in US dollars with equal purchasing power, labour costs for single workers earning the average wage level (see Table 3.12) are highest in Switzerland (USD 82 186), Germany (USD 80 2844) and Belgium (USD 79 308), and lowest in Mexico (USD 14 616), Chile (USD 23 941) and Latvia (USD 29 727). Annual labour costs are equal to annual gross wage in Chile, Denmark and New Zealand. In those countries neither compulsory employer social security contributions nor payroll taxes paid to general government are levied on wages. However, employers in Chile and Denmark are subject to non-tax compulsory payments.

Table 3.1. Income tax plus employee and employer contributions less cash benefits, 2018
Income tax plus employee and employer contributions less cash benefits, 2018

 StatLink http://dx.doi.org/10.1787/888933924626

Figure 3.1. Income tax plus employee and employer contributions less cash benefits, 2018
As a % of labour costs, by household type
picture

Notes: The family type ‘single no child’ corresponds to a wage level of 100% of average wage. The family type ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.

Source: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923125

Table 3.2. Income tax plus employee contributions, 2018
Income tax plus employee contributions, 2018

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Figure 3.2. Income tax plus employee contributions, 2018
As % of gross wage earnings, by household type and wage level
picture

Notes: The family type ‘single no child’ corresponds to a wage level of 100% of average wage. The family type ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.

Sources: country submissions, OECD Economic Outlook Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923144

Table 3.3. Income tax plus employee contributions less cash benefits, 2018
Income tax plus employee contributions less cash benefits, 2018

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Figure 3.3. Income tax plus employee contributions less cash benefits, 2018
As % of gross wage earnings, by household type and wage level
picture

Notes: The family type ‘single no child’ corresponds to a wage level of 100% of average wage. The family type ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.

Source: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923163

Figure 3.4. Income tax, 2018
As % of gross wage earnings, by household type
picture

Notes: The family type ‘single no child’ corresponds to a wage level of 100% of average wage. The family type ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.

Source: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923182

Table 3.5. Employee contributions, 2018
Employee contributions, 2018

 StatLink http://dx.doi.org/10.1787/888933924702

Figure 3.5. Employee contributions, 2018
As % of gross wage earnings, by household type
picture

Notes: The family type ‘single no child’ corresponds to a wage level of 100% of average wage. The family type ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.

Source: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923201

Table 3.6. Marginal rate of income tax plus employee and employer contributions less cash benefits, 2018
Marginal rate of income tax plus employee and employer contributions less cash benefits, 2018

 StatLink http://dx.doi.org/10.1787/888933924721

Figure 3.6. Marginal rate of income tax plus employee and employer contributions less cash benefits, 2018
As % of labour costs, by household type
picture

Notes: The family type “single no child” corresponds to a wage level of 100% of average wage. The family type “married one earner couple

2 children” corresponds to a combined wage level of 100%-0% of average wage.

Source: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923220

Table 3.7. Marginal rate of income tax plus employee contributions less cash benefits, 2018
Marginal rate of income tax plus employee contributions less cash benefits, 2018

 StatLink http://dx.doi.org/10.1787/888933924740

Figure 3.7. Marginal rate of income tax plus employee contributions less cash benefits, 2018
As % of gross wage earnings, by household type
picture

Notes: The family type ‘single no child’ corresponds to a wage level of 100% of average wage. The family type ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.

Source: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2018 issue 2.

 StatLink http://dx.doi.org/10.1787/888933923239

Table 3.8. Percentage increase in net income relative to percentage increase in gross wages, 2018
Percentage increase in net income relative to percentage increase in gross wages, 2018

 StatLink http://dx.doi.org/10.1787/888933924759

Table 3.9. Percentage increase in net income relative to percentage increase in gross labour cost, 2018
Percentage increase in net income relative to percentage increase in gross labour cost, 2018

 StatLink http://dx.doi.org/10.1787/888933924778

Table 3.10. Annual gross wage and net income, single person, 2018
Annual gross wage and net income, single person, 2018

 StatLink http://dx.doi.org/10.1787/888933924797

Table 3.11. Annual gross wage and net income, married couple, 2018
Annual gross wage and net income, married couple, 2018

 StatLink http://dx.doi.org/10.1787/888933924816

Table 3.12. Annual labour costs and net income, single person, 2018
Annual labour costs and net income, single person, 2018

 StatLink http://dx.doi.org/10.1787/888933924835

Table 3.13. Annual labour costs and net income, married couple, 2018
Annual labour costs and net income, married couple, 2018

 StatLink http://dx.doi.org/10.1787/888933924854

Notes

← 1. Tables 3.1 to 3.7 show figures rounded to the first decimal. Due to rounding, changes in percentage points that are presented in the text may differ by one-tenth of a percentage point relative to those in the Tables.

← 2. The reported elasticities in Table 3.8 are calculated as (100 - METR) / (100 - AETR), where METR is the marginal rate of income tax plus employee social security contributions less cash benefits reported in Table 3.7 and AETR is the average rate of income tax plus employee social security contributions less cash benefits reported in Table 3.3.

← 3. The reported elasticities in Table 3.9 are calculated as (100 - METR) / (100 - AETR), where METR is the marginal rate of income tax plus employee and employer social security contributions less cash benefits reported in Table 3.6 and AETR is the average rate of income tax plus employee and employer social security contributions less cash benefits reported in Table 3.1.

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