Executive summary

After falling during the financial crisis, the effective tax rate on the labour costs of the average worker increased by 1 percentage point between 2009 and 2013 before decreasing slightly over the last few years and reaching 36.0% on average in OECD countries in 2016. The effective tax rate, or tax wedge, as a percentage of labour costs, is measured by taking the total taxes and social security contributions (SSCs) paid by employees and employers, minus family benefits received as a proportion of the total labour costs for employers.

Although the OECD average decreased slightly in 2016, 20 OECD countries experienced a higher tax wedge on the average worker compared with 2015, while 14 countries experienced reductions. For 18 of the countries with an increasing tax wedge, the changes were less than 0.50 percentage points.

In most of the countries where the tax wedge on the average worker increased, the main reason for the increase was due to changes to personal income taxes (PIT), even though only two countries increased their statutory rates (Denmark and Greece). Most of the PIT increases were driven by a higher proportion of earnings becoming subject to tax as the value of tax free allowances and tax credits fell relative to earnings. In most countries where there was a fall in the tax wedge, reductions in PIT were the key factor, however, lower SSCs also played a significant role in France, Iceland, Italy and Switzerland.

Since 2009, the year where the OECD average tax wedge was at its lowest level since the Taxing Wages series commenced in 2000, the tax wedge has increased in 20 OECD countries, fallen in 14 others and remained unchanged in one country (Chile). In this time, PIT has risen in 13 of the countries with increasing tax wedges: among those countries three countries had higher statutory PIT rates for workers on average earnings in 2016 than in 2009; six had increased or introduced surtaxes; and two had abolished basic tax credits. This report considers how these changes affect various types of households, including single earners, families with or without children, and single parents. In all OECD countries, the tax wedge for families with children is either lower or, in two cases, the same, as single earners without children.

The report also contains a special feature examining how the labour income tax system can provide incentives or disincentives for workers to invest in human capital and skills. Investment in skills is a key factor in fostering inclusive growth and in raising productivity in OECD economies. The special feature presents effective tax rates on skills investments, incorporating PIT and employees’ SSCs for the sample case of a 32-year-old single worker undertaking a short course of training. In this case, the average effective tax rate on skills is 24.9%, which represents the amount by which the tax system reduces the net present value of the skills investment made by this individual. Overall, tax levels on skills are progressive; those on higher incomes and those who earn a higher return on skills investments are taxed at higher effective rates. While tax expenditures designed to encourage worker training can reduce the effective tax rate on skills, in many countries this support is provided in the form of tax deductions for training expenses related to a workers’ current job. As a result, the benefits of such support are often limited for those seeking to change careers and those on low incomes.