5. 2019 tax burdens (and changes to 2020)
The chapter presents the results of tax burden measures on labour income for the eight model household types for 2019. The chapter includes Tables 5.1 to 5.13 that show a number of measures of the average tax burdens (tax wedge, personal tax rate, net personal tax rate, personal income tax rate and employee social security contribution rate) and the 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.
The table formats are identical to Tables 3.1 to 3.13 which are discussed in Chapter 3 on tax burden results on labour income for 2020. This chapter compares the two sets of tables and analyses the changes in tax burden between 2019 and 2020.
The following commentary on the changes in tax burdens and marginal tax rates between 2019 and 2020 focuses on two of the eight household types – single employees, without children, at the average wage (column 2 of the tables) and one-earner married couples, with two children, at the average wage (column 5). Comparisons with the columns 1, 3-4 and 6-8 of the tables give corresponding results for the six other household types. Generally, only those changes exceeding 1 percentage point for average effective rates and 5 percentage points for marginal effective rates are flagged in this chapter. Most of these are due to tax reforms or changes in the tax systems. Further detailed information on the countries’ tax systems is given in Part II of the Report that is entitled “Country details, 2020”.
Table 5.1 presents the total tax wedge (described as personal income tax plus employee and employer’s social security contributions less cash benefits) by household type as a percentage of labour costs (gross wage plus employers’ social security contributions [including payroll taxes]) in 2019. In the majority of countries, changes in the gap between total labour costs and the corresponding net take-home pay in 2020 as compared with 2019 were within plus or minus one percentage point.
Comparing column 2 in Tables 3.1 and 5.1, the OECD average tax wedge decreased by 0.4 percentage point from 35.0% to 34.6% for a single average worker between 2019 and 2020. It fell by more than one percentage point in Italy (1.9 percentage points) and the United States (1.4 percentage points). In Italy, the change in the tax wedge was mainly driven by a reduction in income taxes due to a temporary additional PAYE tax credit that was introduced in 2020.1 In the United States, the decrease in the tax wedge was mainly due to the Economic Impact Payment (EIP) that was part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) in response to the COVID-19 pandemic. The EIP was a tax credit that could be claimed on the 2020 tax return to be filed in 2021. An advance payment of the credit was made in 2020 and is treated as a cash benefit in the Taxing Wages calculations (further information is given in the country details in Part II of the report). In contrast, there was no increase of more than one percentage point in the tax wedge for the single workers on the average wage level across OECD countries.
For one-earner married couples (comparing column 5 of Tables 3.1 and 5.1) the OECD average tax wedge decreased by 1.1 percentage point from 25.5% to 24.4% between 2019 and 2020. Decreases of more than one percentage point were observed in 15 countries – Austria, Belgium, Canada, Colombia, Germany, Iceland, Ireland, Italy, Korea, Latvia, Lithuania, Luxembourg, the Netherlands, Poland and the United States. For most of those countries, the changes in the tax wedge resulted from the introduction of, or changes in, tax provisions or cash benefits for dependent children. Several of these countries introduced measures related to the COVID-19 crisis in 2020. In Austria (1.7 percentage points), there was a change in the income tax schedule (reduced income tax rate) and an extra child benefit was paid, both in response to the COVID-19 crisis. In Lithuania (9.9 percentage points), in response to the COVID-19 crisis, the tax-exempt amount was increased and also a one-off child benefit payment was made to families. Extra or one-off cash benefit or tax provision payments in response to the COVID-19 crisis were also made in Canada (2.1 percentage points), Germany (1.4 percentage points), Iceland (1.3 percentage points), Korea (2.1 percentage points) and the United States (4.6 percentage points). Detailed explanations on COVID-19 related measures are given in the country details in Part II of the report. In contrast, there was an increase of more than one percentage point only in New Zealand (1.6 percentage points), resulting from a lower income related cash benefit payment in 2020.
Table 5.2 shows the combined burden of personal income tax and employee social security contributions in the form of personal average tax rates as a percentage of gross wage earnings in 2019. For single workers on average wage, it decreased by more than one percentage point between 2019 and 2020 in Luxembourg (1.012 percentage point), Ireland (1.02 percentage points) and Italy (2.5 percentage points). For one-earner couples with two children, personal average tax rates decreased by more than one percentage point for Latvia (1.4 percentage points), Belgium (1.6 percentage points), Ireland and Germany (both by 1.7 percentage points) and Italy (2.8 percentage points). In Latvia, the decline resulted from increases in the basic tax allowance and tax allowance for dependent children. In Germany, a one-time bonus in the child tax credit was made in response to the COVID-19 crisis. In Belgium, the combined effect of increased tax reliefs and a decline in the average wage caused a decrease in the personal average tax rate. For Italy, the reason for the decreases in the personal average tax rates for the single average worker and the one-earner couple with two children is similar to the one previously mentioned for the change in the tax wedge. Finally, in Ireland and Luxembourg, the decreases in the personal average tax rates were mainly due to a reduction in the average wages between 2019 and 2020.3 There was no increase of more than one percentage point in the personal average tax rates for the single workers or the one-earner couples with two children across OECD countries.
Table 5.3 provides the combined burden of personal income tax and employee social security contributions less the amount of cash benefits as a percentage of gross wage earnings in 2019. This is the measure of the net personal average tax rate. Comparing column 2 of Tables 3.3 and 5.3, for single workers on average wage, the net personal average tax rate decreased by more than one percentage point between 2019 and 2020 in Luxembourg (1.01 percentage point), Ireland (1.02 percentage points), the United States (1.5 percentage points) and Italy (2.5 percentage points). For one-earner couples with two children, the net personal average tax rates decreased by more than one percentage point for 16 countries - Colombia (1.02 percentage points), France (1.04 percentage points), Iceland (1.1 percentage point), Luxembourg (1.2 percentage points), Latvia (1.4 percentage points), Germany (1.7 percentage points), Austria and Ireland (both by 2.0 percentage points), Belgium and Canada (both by 2.2 percentage points), the Netherlands (2.3 percentage points), Korea (2.4 percentage points), Italy (3.5 percentage points), Poland and the United States (5.0 percentage points) and Lithuania (10.1 percentage points). For most of those countries, the changes in the net personal average tax rates resulted from the introduction of, or changes in, tax provisions or cash benefits for dependent children. Several of these countries introduced measures related to the COVID-19 crisis in 2020, as discussed in the previous paragraph on the changes in the tax wedge for Austria, Canada, Germany, Iceland, Korea, Lithuania and the United States. Detailed explanations on COVID-19 related measures are given in the country details in Part II of the report. In contrast, there was an increase of more than one percentage point for the one-earner couples with two children in New Zealand (1.6 percentage points) resulting from a lower income related cash benefit payment in 2020 and in Hungary (1.1 percentage point) where the cash benefit payment amount remained unchanged while the tax burden increased between 2019 and 2020. There was no increase of more than one percentage point in the net personal average tax rate for single average workers across the OECD.
Table 5.4 presents information on personal income tax due as a percentage of gross wage earnings in 2019. Comparing column 2 of Tables 3.4 and 5.4, in most OECD member countries, the average personal income tax rates for single workers on average wage changed only slightly between 2019 and 2020 for most OECD member countries. The OECD average personal income tax rate decreased by 0.3 percentage points to 15.1%. For the single average workers, the average personal income tax rate decreased by more than one percentage point in Ireland (1.02 percentage points) and Italy (2.5 percentage points). As previously mentioned, the declines in the tax burden were mainly driven by a decrease in the average wage in Luxembourg and the introduction of a temporary additional PAYE tax credit in Italy4, in 2020. For the one-earner couples with two children, the changes were also minor in most OECD countries between 2019 and 2020 and the OECD average dropped by 0.4 percentage points to 9.8%. Nevertheless, there were decreases of more than one percentage point for the household in 5 countries – Latvia (1.4 percentage points), Belgium (1.6 percentage points), Germany and Ireland (both by 1.7 percentage points) and Italy (2.8 percentage points). As observed for the changes in the personal average tax rates, the declines in the average personal income tax rate resulted from higher tax reliefs in Latvia, an augmented child tax credit in response to the COVID-19 crisis in Germany and the combined effect of increased tax reliefs and a decreasing average wage in Belgium. In Ireland, the decrease in the average personal income tax rate was mainly due the decrease in the average wage in 2020. For Italy, the reason for the change for the one-earner couple with two children is the similar to the one for the single average worker.
Table 5.5 shows information on employee social security contributions as a percentage of gross wage earnings in 2019. Comparing columns 2 and 5 of Tables 3.5 and 5.5, there were no changes of more than one percentage point between 2019 and 2020 for either of these household types among the OECD countries. There were no changes for 29 out of the 37 OECD countries, and changes ranged from -0.6 to 0.4 percentage points for the eight remaining countries (Canada, Finland, Germany, Greece, Israel, Korea, the Netherlands, Switzerland and the United Kingdom).
Table 5.6 shows the marginal tax wedge (rate of personal income tax plus employee and employer social security contributions and payroll taxes where applicable minus cash benefits) as a percentage of labour costs, when the gross wage earnings of the principal earner rises by 1 currency unit in 2019. Comparing columns 2 and 5 respectively in Tables 3.6 and 5.6, changes between 2019 and 2020 in the marginal tax wedge were generally by less than 5 percentage points, the exceptions being Australia (by +7.1 percentage points for both household types), Greece (by -6.3 percentage points for the one-earner couple with two children), Italy (by -7.0 percentage points for both household types) and Norway (by -8.0 percentage points for both household types). In Australia, the taxable income at the average wage level moved into a higher income tax bracket, resulting in a higher marginal personal income tax rate in 2020. In contrast, in Greece, the decreasing marginal tax wedge was caused by a lower marginal personal income tax rate due to a combined effect of the introduction of a lower income tax bracket and the decrease of the average wage between 2019 and 2020. In Italy also, the decreasing marginal tax wedge was caused by a lower marginal personal income tax rate. In fact, the average wage decreased in 2020 and the taxable income moved to a lower income tax bracket compared to 2019. Finally, in Norway, the change in the marginal tax wedge derived from increases in the income thresholds within the income tax bracket at the central government level in 2020.
Table 5.7 presents the marginal rate of personal income tax plus employee social security contributions minus cash benefits (the net personal marginal tax rate) by household type and wage level, when the gross wage earnings of the principal earner rise by 1 currency unit in 2019. Comparing columns 2 and 5 respectively in Tables 3.7 and 5.7, the pattern of changes between 2019 and 2020 in the net personal marginal tax rates were similar to that for the marginal tax wedge discussed above. Changes outside the range of plus or minus 5 percentage points were observed in Australia (by +7.5 percentage points for both household types), Belgium (by -5.5 percentage points for the one-earner couple with two children), Canada (by +5.1 percentage points for the single worker), Greece (by -7.7 percentage points for the one-earner couple with two children), Italy (by -9.2 percentage points for both household types) and Norway (by -9.0 percentage points for both household types). The changes in the net personal marginal tax rates for Australia, Greece, Italy and Norway resulted from changes in the marginal personal income tax rates as explained in the previous paragraph. In Belgium, the maximum amount for the non-earning spouse allowance (i.e. Quotient conjugal) was increased in 2020, resulting in a decrease in the marginal personal income tax rate. Consequently, the household’s net personal marginal tax rate decreased between 2019 and 2020. In contrast, in Canada, the net personal marginal tax rate increased for the single worker due to the withdrawal effect of an income tested federal cash benefit, i.e. the Goods and Services Tax Credit. In 2020, the single worker on the average wage received the income related cash benefit, which was augmented with a one-time supplement in response to the COVID-19 crisis. In 2019, the single average worker did not received the Goods and Services Tax Credit.
Table 5.8 shows the percentage increase in net income relative to the percentage increase in gross wages when the latter increases by 1 currency unit.5 Table 5.9 provides 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.6 The results shown in these two tables are directly dependent upon the marginal and average tax rates that have been discussed in the paragraphs above. Table 5.10 to Table 5.13 report background information on levels of labour costs plus gross and net wages in 2019.
Notes
← 1. The additional PAYE tax credit was included in the draft budget law for 2021 as a measure introduced on a permanent basis in the Italian PIT system.
← 2. Tables 5.1 to 5.7 show figures rounded to the first decimal. The text may present figures rounded to two decimal points for accuracy purposes.
← 3. Further analysis on the impact of average wage changes in the tax burden indicators is available in Chapter 2.
← 4. See note 1.
← 5. The reported elasticities in Table 5.8 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 5.7 and AETR is the average rate of income tax plus employee social security contributions less cash benefits reported in Table 5.3.
← 6. The reported elasticities in Table 5.9 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 5.6 and AETR is the average rate of income tax plus employee and employer social security contributions less cash benefits reported in Table 5.1.