3. 2021 tax burdens
The 2021 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 one-earner couple at the AW level with two children; two-earner couples at 167% and 200% of the AW with two children; and a two-earner couple, without children, at 167% 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.
Table 3.11 and Figure 3.1 show the average tax wedge for 2021, calculated as the combined burden of income tax, employee and employer social security contributions (SSCs) taking into account the amount of cash benefits to which each specific household type was entitled. Total taxes due minus transfers received are expressed as a percentage of labour costs, defined as gross wage plus employers’ SSCs (including payroll taxes). In the case of a single person on the average wage (AW), the tax wedge ranged from zero (Colombia) and 7.0% (Chile) to 48.1% (Germany) and 52.6% (Belgium). For a one-earner married couple with two children, at the average wage level, the tax wedge was lowest in Chile (-18.5%) and Colombia (-5.0%) and highest in Finland (38.6%) and France (39.0%). 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 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 AW, was negative in Chile (-24.4%), New Zealand (-16.3%), Colombia (-7.4%), Australia (-1.0%) and the United States (-0.1%). Negative tax wedges are due to the cash benefits received by families, plus any applicable non-wastable tax credits, exceeding 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 SSCs in 2021, 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). For single workers at the average wage level without children, the highest average tax plus contributions burdens were seen in Germany (37.7%) and Belgium (39.8%). The lowest average rates were in Colombia (0.0%), Chile (7.0%), Mexico (10.2%), Costa Rica (10.5%), Korea (15.3%), Estonia (17.1%), Switzerland (17.9%), New Zealand (19.4%), the Czech Republic (19.6%) and Israel (19.7%).
Table 3.3 shows the combined burden of income tax and employee SSCs, reduced by the entitlement to cash benefits, for each household type in 2021. 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 3.3 because most OECD countries support families with children through cash benefits.
Comparing Table 3.2 and Table 3.3 for single parents with two children earning 67% of the average wage shows that 33 countries provided cash benefits in 2021. In Poland, New Zealand and Chile, these represented respectively 31.7%, 31.6% and 31.4% of income and they exceeded 25% of income in Denmark (25.7%). Thirty-three countries provided cash benefits for a one-earner married couple, with two children, earning the average wage level, although these were less generous relative to income, ranging up to 19.7% in Poland and 25.5% in Chile. 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 in 2021. For single persons without children at the average wage (column 2), the income tax burden ranged from 0.0% (Chile, Colombia and Costa Rica) to 35.5% (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 for single persons (compare columns 2 and 5). These differences are illustrated in Figure 3.4. In twelve 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 (the Czech Republic, Germany, Hungary, Luxembourg, Poland, Portugal, the Slovak Republic, Slovenia, Switzerland and the United States). In contrast, there was no difference in eleven countries: Australia, Chile, Colombia, Costa Rica, Finland, Israel, Lithuania, Mexico, New Zealand, Norway and Sweden. In Chile, Colombia and Costa Rica, neither the single worker on the average wage nor the one-earner married couple at the average wage paid personal income taxes.
There were only three OECD countries where a married average worker with two children had a negative personal income tax burden. This was due to the presence of non-wastable tax credits, whereby credits were paid in excess of the taxes otherwise due. This resulted in tax burdens of -0.5% in the Slovak Republic, -0.7% in Germany and -8.6% in the Czech Republic. Similarly, single parents with two children earning 67% of the average wage showed a negative tax burden in seven countries: Austria, the Czech Republic, Germany, Poland, the Slovak Republic, Spain and the United States. In four other countries – Chile, Colombia, Costa Rica and Israel – this household type paid no income tax.
Comparison of columns 5 and 6 in Table 3.4 demonstrates that if the second spouse had a job that paid 67% of the average wage, the income tax burden of the household (now expressed as 167% of the average wage) was slightly higher in 22 countries, the largest differences being in the Czech Republic (9.1 percentage points) and Germany (9.8 percentage points). At the same time, the income tax burden was lower in thirteen countries, the largest differences being in the Netherlands (-4.9 percentage points) and Israel (-4.0 percentage points). There was no impact on the tax burden in Chile, Colombia and Costa Rica.
An important consideration in the design of an income tax is the degree 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 progressivity of 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 faced a lower tax burden in all countries except in Colombia and Hungary in 2021. In Colombia, neither the average single worker nor their counterpart at 167% of the average wage paid income tax. In Hungary, a flat tax rate was applied on labour income and all households without children paid the same percentage of income tax. Comparing single individuals at 67% of the average wage level with their counterparts at the average wage level (columns 1 and 2), the lower-paid worker also faced a lower tax burden across all OECD countries, except Colombia and Hungary for the reasons previously mentioned. Finally, the burden faced by single individuals at 67% of the average wage level represented less than 25% of the burden faced by their counterparts at 167% in five OECD countries: Chile (0.0%), Costa Rica (0.0%), Greece (16.7%), the Netherlands (18.7%) and Korea (23.6%).
The addition of SSCs 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 higher-income workers). When comparing Table 3.2 with Table 3.4, the OECD personal average tax burden including SSCs for single individuals at 67% of the average wage level was only 31.7% lower than their counterparts at 167% compared to the OECD average tax savings of 48.0% for personal income taxes alone in 2020. The OECD average tax savings observed for one-earner married couples with two children at the average wage level relative to the average single worker fell from 33.6% for the personal income tax to 20.5% for the personal average tax burden including SSCs. These lower figures reflect that there is little variation in SSC rates across household types, as shown in Table 3.5.
Table 3.5 shows employee SSCs as a percentage of gross wage earnings in 2021. For a single worker without children at the average wage (column 2), the contribution rate varied between zero (Australia, Colombia, Denmark and New Zealand) and 22.1% (Slovenia). Australia, Denmark and New Zealand did not levy any employee SSCs paid to general government. In Colombia, most of the SSCs are paid to funds outside the general government and are considered to be non-tax compulsory payments. Therefore, they are not counted as SSCs in the Taxing Wages calculations. There were three other countries with very low rates: Iceland (0.1%), Mexico (1.4%) and Estonia (1.6%).
SSCs 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 AW. The flat rates result in a constant average burden of SSCs for most countries between 67% and 167% of average wage earnings. A constant proportional burden for employee SSCs for the eight model household types was observed in Slovenia (22.1%), Lithuania (19.5%), Hungary (18.5%), Poland (17.8%), Turkey (15.0%), Greece (14.1%), the Slovak Republic (13.4%), the Czech Republic and Portugal (both 11.0%), Latvia and Costa Rica (both 10.5%), Norway (8.2%), the United States (7.7%), Chile (7.0%), Spain and Switzerland (both 6.4%), Ireland (4.0%) and Estonia (1.6%).
In addition, at the average wage level, Germany and the Netherlands imposed different levels of SSCs on employees according to their family status (see Figure 3.5).
Table 3.6 and Figure 3.6 show the percentage of the marginal increase in labour costs that was deducted through the combined effect of increasing personal income tax, employee and employer SSCs (including payroll taxes) and decreasing cash transfers in 2021. 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, the marginal tax wedge absorbed 25% to 55% of an increase in labour costs for single individuals on average wage without children in 2021. However, in seven OECD countries, these individuals faced marginal wedges above 55%: Finland (56.1%), Luxembourg (57.2%), Germany (58.0%), France (58.2%), Austria (59.5%), Italy (64.0%) and Belgium (65.1%). By contrast, Chile (7.0%) had the lowest marginal tax wedge in 2021. For Colombia, no income tax was paid at the average wage level in 2021 while SSCs are considered as non-tax compulsory payments and are thus not included in the Taxing Wages calculations.2
In twenty-six OECD member countries, the marginal tax wedge for one-earner married couples at average earnings with two children was either the same as that for single persons at average wage with no children or within 5 percentage points thereof. The marginal tax wedge was more than 5 percentage points lower for one-earner married couples in seven countries: France (16.3 percentage points), Luxembourg (14.2 percentage points), the Czech Republic (11.2 percentage points), the United States (9.3 percentage points), Switzerland (7.9 percentage points), Slovenia (6.7 percentage points) and Germany (6.2 percentage points). In contrast, the marginal rate for one-earner married couples with two children was more than 5 percentage points higher than it was for single workers with no children in Canada (5.5 percentage points), the Netherlands (5.6 percentage points), Iceland (9.0 percentage points) and New Zealand (25.0 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 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 SSCs less cash benefits when gross wage earnings increased at the margin in 2021. As in the case of the tax wedge, in most cases personal income tax and employee SSCs 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 was higher than 55% only in Belgium (55.6%) and lower than 25% in Chile (7.0%), Costa Rica (10.5%), Mexico (17.6%) and Korea (23.3%). As previously mentioned, no income tax was paid in Colombia at the average wage while SSCs are considered as non-tax compulsory payments and not included in the Taxing Wages calculations.
In twenty-six OECD member countries, the net personal marginal tax rate for one-earner married couples with two children at the average wage level was either the same or within 5 percentage points as that for single persons with no children. The marginal rate was more than 5 percentage points lower for the one-earner married couples in eight countries: France (22.2 percentage points), Luxembourg (16.2 percentage points), the Czech Republic (15.0 percentage points), the United States (10.0 percentage points), Switzerland (8.4 percentage points), Slovenia (7.8 percentage points), Germany (7.6 percentage points) and Portugal (5.5 percentage points). In contrast, the marginal rate for one-earner married couples with two children was more than 5 percentage points higher than it was for single persons with no children in Canada (5.7 percentage points), the Netherlands (6.3 percentage points), Iceland (9.6 percentage points) and New Zealand (25.0 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 increased by 1 currency unit in 2021, i.e. the elasticity of after-tax income.3 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), the most progressive systems of income tax plus employee SSCs in 2021 were found in New Zealand (0.48), Belgium and Italy (both 0.56) and Ireland (0.57). In contrast, France (0.95) and Mexico (0.92) either implemented or were close to a proportional system of income tax plus employee SSCs for this household type. For Colombia (0.95) and Costa Rica (1.0), no income tax was paid at that level of earnings. In Colombia, SSCs are considered as non-tax compulsory payments and not included in the Taxing Wages calculations. However, the household’s cash benefit payment remained fixed while the gross wage increased. As a result, the percentage increase in net income was slightly less than the percentage increase in gross wage.
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 SSCs and payroll taxes) when the latter rose by 1 currency unit in 2021.4 In this case, taxes and SSCs paid by employers are also part of the analysis. In twenty OECD countries, the value of this elasticity lay between 0.50 and 0.97 for the eight selected household types. This elasticity was below 0.50 for single parents earning 67% of the average wage level in New Zealand (0.49), the United States (0.48), Luxembourg and Belgium (both 0.45), Australia (0.41), France (0.32), Ireland (0.27), Canada (0.24) and Poland (0.03) and for one-earner married couples at the average wage level with two children in New Zealand (0.48). In contrast, the elasticity was between 0.98 and 1.0 for most household types in Costa Rica and some household types in Canada, Chile, Colombia, Hungary, Mexico and Poland, and one household type in Estonia for the single worker earning 167% of the AW (1.0). Using this elasticity measure, the income tax system was regressive for a single individual at 167% of the AW in Germany (1.08) and Austria (1.11).
Table 3.10 and Table 3.11 set out gross wage earnings and net income for the eight household types in 2021, after all amounts have been converted into U.S. dollars with the same purchasing power. Single workers with the average wage took home over USD 45 000 in eleven countries: Switzerland (USD 69 359), Luxembourg (USD 53 025), the Netherlands (USD 53 070), Iceland (USD 49 642), Ireland (49 602), United Kingdom (USD 49 396), Australia (USD 47 884), the United States (USD 48 737), Norway (USD 47 596), Korea (USD 46 891) and Denkmark (USD 45 685). (Table 3.10 column 4). The lowest levels (less than USD 20 000) were in Mexico (USD 12 554) and Colombia (USD 13 877). In the case of a one-earner married couple with two children at the average wage level, families took home over USD 50 000 in Australia, Austria, Belgium, Canada, Denmark, Germany, Iceland, Ireland, Luxembourg, Netherlands, Norway, Switzerland, the United Kingdom and the United States; with the lowest level again being in Colombia and Mexico (Table 3.11). With the exception of Costa Rica and Mexico, the one-earner married couple in OECD countries took home more than the single individual (with 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 were 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 in 2021. 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 significantly higher than gross wages, because any employer SSCs (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) were highest (more than USD 80 000) in the Netherlands (USD 82 060), Germany (USD 85 370), Austria (USD 85 480), Belgium (USD 88 663), Luxembourg (USD 88 678) and Switzerland (USD 89 841), and lowest (less than USD 30 000) in Colombia (USD 13 877), Mexico (USD 15 619) and Chile (USD 25 127). Annual labour costs are equal to annual gross wage in Chile, Colombia, Denmark and New Zealand. In those countries, neither compulsory employer SSCs nor payroll taxes paid to general government are levied on wages. However, employers in Chile, Colombia and Denmark are subject to non-tax compulsory payments.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
Note: The household type ‘single no child’ corresponds to a wage level of 100% of average wage and ‘married one earner couple 2 children’ corresponds to a combined wage level of 100%-0% of average wage.
Sources: OECD calculations based on country submissions and OECD Economic Outlook, Volume 2021 issue 2.
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. In Colombia, the general social security system for healthcare is financed by public and private funds. The pension system is a hybrid of two different systems: a defined-contribution, fully-funded pension system; and a pay-as-you-go system. Each of those contributions are mandatory and more than 50% of total contributions are made to privately managed funds. Therefore, they are considered to be non-tax compulsory payments (NTCPs) (further information is available in the country details in Part II of the report). In addition, in Colombia, all payments for employment risk are made to privately managed funds and are considered to be NTCPs. Other countries also have NTCPs (please see https://www.oecd.org/tax/tax-policy/tax-database/ ).
← 3. 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.
← 4. 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.