Chapter 3. 2013 tax burdens
The 2013 tax burden estimates are presented in Tables 3.1 to 3.10 and Figures 3.1 to 3.8. There are eight model family types varying by marital status, number of children and level of earnings: 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 with two children at 133% and 167% of the AW and a two-earner couple without children at 133% of the AW. The results are also presented for a single worker without children and a married couple with two children for each decile of the income distribution. There is a third set of results for these two family types earning an annual gross wage equivalent to USD 10 000, USD 48 000 and USD 60 000.
The chapter presents different measures for the average tax burdens (tax wedge, 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, 2013 estimates
This section comments on Tables 3.1.a-Table 3.4.d and Figures 3.1.a-Figure 3.4.d. These summary tables and charts show results for 8 family types, characterised by different family status (single/married, no children or 2 children), household income composition (one earner-two earner) and wage level (33%, 67%, 100% and 167% of annual gross wage earnings for an average worker). They also show results by income deciles of formal workers for the single person without children and the one-earner married couple with 2 children and in USD equivalents for the single worker without children and one-earner married couple with 2 children.
Table 3.1.a and Figure 3.1.a show the average tax wedge (the combined burden of income tax and all compulsory employee and employer social security contributions) taking into account the cash benefits each of 8 specific family-types is entitled to receive. Total levies due minus cash transfers received are expressed as a percentage of total labour costs, defined as gross wage plus employer social security contributions (including payroll taxes). In the case of a single individual without children at the average wage level, the wedges range from 10.0% (Honduras) and 11.0% (Trinidad and Tobago) to 32.2% (Brazil) and 34.6% (Argentina). For the one-earner married couple with 2 children at the average wage level, the results follow a similar pattern. The lowest are still 10.0% (Honduras) and 11.0% (Trinidad and Tobago) and the highest 33.0% (Argentina) and 32.2% (Brazil). As noted in Section 1.3, Family Rates in Chapter 1, the wedge is lower for a married couple with 2 children due to the receipt of cash benefits and/or more advantageous tax treatment in 5 countries in the region. It is also notable that the presence of children reduces the tax wedge of a single individual at 67% of the average wage by an average of 0.7 percentage points. The largest reductions in the tax wedge were 4.5 percentage points in Colombia, 4.4 percentage points in Argentina and 4.3 percentage points in Uruguay.
Note: Both the single worker without children and the one-earner married couple with 2 children are assumed to earn the average wage.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. The source for OECD averages is OECD (2014) Taxing Wages, Table I.1. It should be noted that the OECD figures are not directly comparable with the other figures in the table as they do not include social security contributions paid to privately managed funds which are not classified as taxes in the OECD methodology.
Tables 3.1.b and 3.1.c present the average tax wedge over the whole of the labour income distributions of formal wage earners in each country. These data are derived from the household surveys. Figures 3.1.b and 3.1.c compare for the tax wedges for these two family types in both the fifth and the tenth income deciles.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
Table 3.1.b shows a zero tax wedge for a single person without children in the first decile of labour income for seven countries (Bolivia, Colombia, Costa Rica, Ecuador, Honduras, Nicaragua and Peru). This is due to the existence of lower earnings thresholds that are in place for the contributions to the social security programmes. In the case of the one-earner married couple with 2 children, the family benefits or preferential tax treatments reduce the tax wedge in the first decile of the income distribution for some countries, turning it negative in the cases of Colombia (-8.2%) and Costa Rica (-4.1%). In the cases of Argentina, Chile and Uruguay, the tax wedge is significantly reduced (33.0, 11.1 and 12.6 percentage points respectively). The average reduction is 3.7 percentage points. The sizes of these benefits decrease as labour incomes rise. In the tenth income decile (Figure 3.1.c), the difference between the regional averages for the two family profiles narrows to only 0.2 percentage points in favour of the married couple with two children profile. Finally, Table 3.1.d and Figure 3.1.d compare the tax wedges for employees earning an annual wage of USD 10 000, USD 48 000 and USD 60 000. At these levels of earnings, the average tax wedges for a single earner without children are 22.8%, 29.1% and 30.1% of total labour costs respectively. For the one-earner married couple with 2 children, the corresponding figures are 21.7%, 28.9% and 29.9% of total labour costs.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
Tables 3.2.a-Table 3.2.d and Figures 3.2.a-Figure 3.2.d present the combined burden of the income tax and employee social security contributions after cash benefits, expressed as a percentage of gross wage earnings (the corresponding separate measures for income tax and social security contributions are shown separately in Tables 3.3.a-Table 3.3.d, and Tables 3.4.a-Table 3.4.d). The average tax and contributions rate for a single person at the average wage level without children across the region is 9.3% of annual gross wage earnings. This worker is liable to a 19.1% tax burden in Chile1 and 18% in Uruguay. The countries with the lowest average rates were Honduras, Guatemala and Trinidad and Tobago (3.6%, 4.0% and 4.5% of annual average gross wage earnings respectively).
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. The source for OECD averages is OECD (2014) Taxing Wages, Table I.3. It should be noted that the OECD figures are not directly comparable with the other figures in the table as they do not include social security contributions paid to privately managed funds which are not classified as taxes in the OECD methodology.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
The regional average for the one-earner married couple 2 children at the average wage was 8.9% of gross wage earnings, 0.4 percentage points below the corresponding single individual without children. The highest average rates for this family profile were also in Chile (19.1%) and Uruguay (17.2%), while the lowest burdens were the same as for the single without children family profile.
In contrast, there is a much larger gap between the measures for the two family types in OECD countries2 (11.2 percentage points compared with 0.4 in Latin America and the Caribbean). Furthermore, the average tax rate that a single taxpayer without children in Latin American and the Caribbean faces is only slightly less (0.9 percentage points) than a single individual with 2 children when both earn a 67% of the average wage. The corresponding gap in the OECD averages is 17.4 percentage points.
The number of sources of income that comprise the total amount of the wage earnings in the household also affects the size of the tax burden. Consider the case of a single individual without children earning 167% of the average wage compared with the two-earner married couple whose combined income totals 167% of the average wage. In this situation, the tax burden faced by the former is 2.5 percentage points higher in the LAC region and 10.9 percentage points larger in OECD countries.
Tables 3.2.b and 3.2.c show how the net tax rates after cash benefits change across the income distribution. Single individuals without children in the first income decile have a zero tax rate in 10 countries (Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Honduras, Nicaragua, Paraguay and Peru). The tax rate at this income level is negative in Mexico due to the annual employment subsidy, through which a worker receives an additional 17.0% of the average wage. On the other hand, the corresponding workers in Chile, Argentina and Uruguay face the highest tax rates (19.1%, 17.0% and 16.6% of the average wage respectively). One-earner married couples with 2 children in the first income decile face lower tax rates compared with the single worker without children in 5 countries. In Argentina, the tax rate in the first income decile for a single individual without children is reduced from a liability of 17.0% of gross wage earnings to a benefit or credit of 24.9% for the one-earner married couple with two children family profile. One-earner married couples also receive tax benefits in Colombia and Costa Rica, (8.2% and 4.1% of gross earnings respectively), compared with zero liability for the single worker without children. In Uruguay, the tax rate is reduced by 14.9 percentage points to 1.7% of average wage earnings. The tables show that the tax rates for the two family types in these 5 countries tend to converge as incomes rise. In the tenth income decile, the highest tax rates for both family profiles are in Uruguay (26.0% and 25.7% respectively) while the lowest rates are 5.9% for both in Guatemala.
Table 3.3.a shows that workers in the 8 family types receiving the average wage are not liable for personal income tax in any of the countries except in Mexico. For the single individual without children at 167% of the average wage, the picture changes and workers in 7 of the 20 countries pay no income tax, while the other 13 countries have average income tax rates that vary from 0.8% of gross wage earnings (Chile) to 13% (Mexico). The average for the region is 2.2%, substantially less than the OECD average (21.7%). For the married couple family types, there is a zero income tax rate in each country except for Mexico and Costa Rica, where it is negative because of tax credits granted in respect of spouses and children in the household. Tables 3.3.b and 3.3.c show that even in the seventh income decile, it is only in Mexico that workers pay income tax. The pattern starts to alter in the eighth and ninth deciles where single workers pay income tax in 3 countries and 9 countries respectively. But even at the higher levels of wage earnings, the average income tax rates are relatively low, averaging 6.4% of wage earnings for a single individual without children and 6.2% for the one-earner married couple with 2 children in the tenth income decile. Also, in the ninth income decile, the average income tax rates range from zero in 11 countries to 12.8% in Mexico for both family profiles. Table 3.3.d shows an average income tax rate across the region of 2.0% paid on annual wage earnings of USD 10 000. These tables also highlight an important feature of personal income tax systems in Latin American and Caribbean countries; although they are designed to be very progressive, they raise relatively little revenue because of the high levels of exempt income, which erode the redistributive power of the tax.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
Table and Figures 3.4.a-Figure 3.4.d present figures for employee social security contribution rates. The payments vary from 2.5% (Mexico) to 19.1% (Chile) of gross wage earnings for a single individual without children on the average wage. The average for the region is 8.9%. In comparison, the average worker across the OECD pays 9.9% of gross wage earnings. The situation is very similar for a one-earner married couple with 2 children at the average wage level where the average rate is also 9.0% with payments ranging from 2.5% (Mexico) to 19.4% (Uruguay).
Note: Both the single worker without children and the one-earner married couple with 2 children are assumed to earn the average wage.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. The source for OECD averages is OECD (2014) Taxing Wages, Table I.5. It should be noted that the OECD figures are not directly comparable with the other figures in the table as they do not include social security contributions paid to privately managed funds which are not classified as taxes in the OECD methodology.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
Tables 3.4.b and 3.4.c show that the rates of mandatory social security contributions vary at the different deciles of labour income. Some countries do no impose social security payments on their citizens at the lowest income levels because of lower earnings thresholds associated with social security contribution programmes. These thresholds are generally linked to the minimum wage. After the contributions commence, the contribution rates are in most cases stable as income rises. In most countries, this stability is attained by the fifth income decile of income. Honduras is an exception where payments start at the seventh income decile. In some countries the contribution rates start to decline in the higher income deciles as upper earnings ceilings on payments, usually in old-age and health insurance programmes, start to take effect. For the single person without children, employee social security contributions are an average of 8.5% of gross wage earnings across the region at the tenth decile of labour income being highest at 19.1% in Chile and lowest at 1.4% in Honduras. For the one-earner married couple with 2 children at the same income decile, the average rate contribution rate is 8.6% with the same highest and lowest examples. A comparison between the regional averages paid at the fifth income decile and the tenth income decile shows a reduction of 0.2 percentage points for the higher decile group for both family profiles.
Table 3.4.d provides a clearer illustration of the decline of average employee social security contribution rates as income rises from USD 10 000 to USD 60 000; the average contribution rate across the region for the single worker declines by 1.6 percentage points of gross wage earnings between the two earnings levels. The rates are reduced in 12 countries and unchanged in 6 others. Bolivia and Colombia are the exceptions which exhibit an increase in the employee social security contribution rate as income increases. The results for the one-earner married couple with 2 children show a similar pattern.
Marginal tax burdens, 2013 estimates
Table 3.5.a and Figure 3.5.a show the percentage of a one unit increase of labour costs of a worker that is deducted through the personal income tax and both employee and employer contributions after changes in cash benefits. This is known as the marginal tax wedge. The difference between the marginal tax wedge and the increase in wages provides a measure of how much of a marginal increase in labour costs adds to net take-home pay. In most of the countries in the region, the marginal wedge absorbed between 13% and 35% of the rise in one unit of the labour costs for a single individual without children on the average wage. Honduras and Trinidad are exceptions where these workers have a zero marginal tax wedge at the average income level. The average marginal tax wedge for the region is 20.8% compared with the OECD equivalent of 45.0%. The figures for a one-earner married couple with 2 children present a similar picture.
Note: Both the single worker without children and the one-earner married couple with 2 children are assumed to earn the average wage.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. The source for OECD averages is OECD (2014) Taxing Wages, Table I.6. It should be noted that the OECD figures are not directly comparable with the other figures in the table as they do not include social security contributions paid to privately managed funds which are not classified as taxes in the OECD methodology.
3. Assumes a one unit currency rise in labour costs of the principal earner within the household.
Tables 3.5.b and 3.5.c show the marginal tax wedge over the whole of the income distribution. For a single individual without children and wages in the first income decile, the average marginal tax wedge for the region is 10.2% of total labour costs. At this level of income, the highest marginal tax wedge is 34.6% (Argentina), while there is a zero marginal wedge in Bolivia, Colombia, Costa Rica, Ecuador, Honduras, Nicaragua, Peru and Trinidad and Tobago. At the tenth income decile, the average marginal tax wedge for the region rises to 29.3% of total labour costs with a range of 16% to 39%.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. Assumes a one-unit currency rise in labour costs of the principal earner within the household.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. Assumes a one-unit currency rise in labour costs of the principal earner within the household.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. Assumes a one-unit currency rise in labour costs of the principal earner within the household.
Tables 3.6.a-Table 3.6.d and Figures 3.6.a-Figure 3.6.d show the marginal rates of personal income taxes, employee social security contributions and cash benefits of a unit increase in annual gross earnings. Across the region, a single person without children on average earnings faced an average marginal rate of 9.3% with different countries ranging from zero to 19.1% compared with the OECD average of 36.1%. There is a similar picture for the one-earner married couple with 2 children.
Note: Both the single worker without children and the one-earner married couple with 2 children are assumed to earn the average wage.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. The source for OECD averages is OECD (2014) Taxing Wages, Table I.7. It should be noted that the OECD figures are not directly comparable with the other figures in the table as they do not include social security contributions paid to privately managed funds which are not classified as taxes in the OECD methodology.
3. Assumes a one unit currency rise in labour costs of the principal earner within the household.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. Assumes a one-unit currency rise in gross wage earnings of the principal earner within the household.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. Assumes a one-unit currency rise in gross wage earnings of the principal earner within the household.
1. Represents the unweighted average for the group of 20 Latin American and Caribbean countries. Chile and Mexico are also part of the OECD group.
2. Assumes a one-unit currency rise in gross wage earnings of the principal earner within the household.
Tables 3.6.b and 3.6.c show the estimates of the marginal rate of income tax and employee social security contributions minus cash benefits over the whole of the labour income distribution. The figures show that the marginal rate increases as incomes rise. For a single individual without children, the average marginal rate across the region is 4.7% at the first income decile increasing to 20.2% at the tenth decile. At the tenth decile, the marginal rates range from 7.9% in Colombia to 29.2% in Jamaica. For the one-earner married couple with 2 children, the variation in the average rate across the income distribution is slightly smaller, ranging from 4.7% to 20.0%. It is notable that over the whole of the labour income distribution, Trinidad and Tobago has a zero marginal rate until the ninth decile of income and Honduras until the tenth decile of income for both family profiles.
Tables 3.7.a-Table 3.7.d present the percentage increases in net income when gross wage earnings rise by 1 currency unit (the elasticity of after-tax income).3 Under a proportional tax system, net income would increase in the same proportion as the increase in gross wage earnings, in which case the elasticity is equal to 1. The more progressive the system is – at the earnings level considered – the lower the elasticity will be. In contrast, higher elasticities imply that a percentage increase in gross payment leads to an increase in net income in excess of the percentage increase in gross wage earnings and thus a regressive tax system. For a single earner without children on the average wage, the most progressive system, on this measure, is Mexico (0.91). The remainder of the countries exhibit proportional tax systems (elasticity of 1), with the exception of Honduras (1.04) and Trinidad and Tobago (1.05). The average for the region displays a proportional tax system (elasticity of 1) in which net income increases at the same percentage of gross earnings (1.0). In comparison, the corresponding OECD average is 0.85. These results are very similar for the one-earner married couple with 2 children, except for Argentina (0.98), Colombia (0.96), Costa Rica (0.99) and Uruguay (0.97). For the other countries, the elasticity of the after-tax income equals 1. The regional average was 0.99 well above the corresponding OECD average of 0.73.
Figure 3.7 shows that the average elasticity coefficients of a single individual without children in the region vary across the labour income distribution from 0.94 to 1.00. At the lower and middle levels of income the tax systems tend to be proportional on average becoming slightly more progressive at the higher levels (income deciles 8 to 10). For the one-earner married couple with two children, the elasticity coefficients range from 0.94 to 0.99. In this case, the average elasticity coefficient is slightly progressive at the lowest income deciles. As income rises, the average coefficient tends to become more proportional until the eigth income decile where it starts to become more progressive.
← 1. The reported elasticities 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 Tables 3.6.b and 3.6.b and AETR is the average rate of income tax plus employee social security contributions less cash benefits reported in Table 3.2.b and 3.2.c.
Tables 3.8.a-Table 3.8.d provide a related but different form of elasticity measure: the percentage increase in net income when labour costs (i.e. gross wage earnings plus employer social security contributions and payroll taxes) rise by 1 currency unit.4 In this case, taxes and social security payments made by employers are also part of the analysis. For a single individual without children on the average wage, the most common value of the elasticity across the region is 1.0, the exceptions being Mexico (0.94), Honduras (1.11) and Trinidad and Tobago (1.12). The average elasticity for the region as a whole is 1.01, 0.16 percentage points higher than the OECD average of 0.85. At 167% of the average wage, the average elasticity for the region is reduced to 0.94 compared with 0.86 for OECD countries. The most progressive systems are Jamaica (0.77), Peru (0.84) and Panama (0.87), while the only regressive, on this measure, is El Salvador (1.05).
For the one-earner married couple with 2 children the regional average is 1.0 compared with 0.73 for the OECD. The lowest elasticities were 0.94 (Mexico), 0.96 (Colombia), 0.97 (Uruguay) and 0.98 (Argentina); whereas the highest elasticities were 1.11 (Honduras) and 1.12 (Trinidad and Tobago).
Figure 3.8 compares the regional averages for the single worker without children and the one-earner married couple with 2 children. For a single individual the elasticity tends to be either 1.0 or slightly higher until the ninth income decile when it reduces to 0.96. In contrast, the one-earner married couple with 2 children shows more progressivity at the lower income deciles, becoming proportional in the middle income deciles and then progressive at the higher levels of income. It should be noted that that the two family profiles shown in Figure 3.8 converge at the higher income deciles.
← 1. The reported elasticities 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 Tables 3.5.b and 3.5.c and AETR is the average rate of income tax plus employee and employer social security contributions less cash benefits reported in Tables 3.1.b and 3.1.c.
Tables 3.9.a and 3.9.b show the annual gross wage and net income, in USD equivalents using purchasing power parities (PPP), for the 8 family-types. At the average wage, total earnings before taxes varied from USD 5 932 (Jamaica) to USD 31 808 (Argentina). The average for the region is USD 13 771 which is about one-third of the USD 40 292 equivalent for OECD countries. Once taxes are taken into account, the net income for the average single worker in the region varied from USD 5 535 (Jamaica) to USD 26 400 (Argentina). The average for the region was USD 12 347, about 41% of the OECD average (USD 29 592).
Tables 3.9.c-Table 3.9.f show the corresponding figures for two family profiles over the whole of the labour income distribution. Gross labour income in the region varied from an average of USD 4 542 in the first income decile to USD 38 947 in the tenth decile. In the first decile, it varied from USD 973 (Jamaica) to USD 7 365 (Venezuela). In the tenth decile, the range was USD 24 795 (Jamaica) to USD 55 960 (Chile). Once taxes are accounted for, the net income of a single individual without children in the first income decile ranged from USD 908 (Jamaica) to USD 6 959 (Venezuela). The corresponding range for the tenth decile was USD 19 188 (Jamaica) to USD 46 231 (Colombia). The situation is very similar for the married one-earner married couple with 2 children.
Finally, Tables 3.10.a-Table 3.10.f present a similar analysis comparing total labour costs with net incomes. At the average wage, the average labour cost for the region was USD 16 125 ranging from USD 6 639 (Jamaica) to USD 40 380 (Argentina). The corresponding net income figures are the same as in Tables 3.9.a-Table 3.9.f.
References
OECD (2014), TaxingWages 2014, OECD Publishing. https://doi.org/10.1787/tax_wages-2014-en
Notes
← 1. This figure is in contrast to corresponding result of 7% shown in the Taxing Wages model (OECD, 2014) which does not take account of social security payments paid to privately managed funds.
← 2. The figures are not directly comparable (see endnote 1 above) but they demonstrate the relatively generous more treatment of family with children in the income tax/benefit systems of OECD countries compared with Latin America and the Caribbean.
← 3. The reported elasticities in Tables 3.7 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 Tables 3.6 and AETR is the average rate plus employee social security contributions less cash benefits reported in Tables 3.2.
← 4. The reported elasticities in Tables 3.8 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 Tables 3.5 and AETR is the average rate plus employee and employer social security contributions less cash benefits reported in Table 3.1.