Chapter 4. Graphical exposition of the 2013 tax burden
This chapter presents a graphical exposition of the tax burdens on labour income in 2013 by income decile. These are illustrated in separate graphs for each of two family types in each Latin American and Caribbean country. The family types are single taxpayers without children and one-earner married couples with two children.
The graphs are divided into two sets showing the average and the marginal tax wedge components as percentage of total labour costs (income taxes; employee and employer social security contributions and family benefits). The graphs also show the net personal average and marginal tax rates.
The graphs in this section show the estimated tax burden on labour income in 2013 for gross wage earnings over the whole of the distribution of labour income for formal workers ordered by deciles. For each of the Latin America and Caribbean countries, there are separate graphs for two family types: a single person without children and a one-earner married couple with two children. The net personal average tax rate and the net personal marginal tax rate (defined as the change in personal income taxes and employee social security contributions net of cash benefits as a result of an increase in gross wage earnings) are included in the graphs.1 The graphs also show respectively the composition of the average and marginal tax wedge.
The graphs for the average tax wedges illustrate the relative importance of the different components of the tax wedges; personal income taxes, employee social security contributions, employer social security contributions (including payroll taxes where applicable) and family benefits as a percentage of total labour costs. Those for the marginal tax wedge are the same except they present the change in value of each tax/benefit component as a percentage of the change in labour costs. For each earnings point on the charts, the earnings level represents the average earnings within the decile. It should be noted that a decreasing share in total labour costs does not necessarily imply that the corresponding taxes or cash benefits are decreasing in cash terms. A decreasing share of the tax wedge only implies that the total value of the taxes and social security contributions less benefits is not increasing as rapidly as total labour costs.
Families, especially at the lower levels of the labour income distribution, are treated favourably by tax-benefit schemes in 7 of the 20 countries in the region. When taking into account cash benefits paid to the family together with income taxes and employee social security contributions, one-earner married couples with two children have a negative net personal average tax rate in some parts of the income distribution in 4 countries. In Argentina the net personal average rate of the family becomes positive at earnings levels contained in the fifth income decile. Mexico provides a formal employment subsidy credit to workers resulting in a negative personal average tax rate up to an earnings level contained in the fourth income decile. This applies to all workers with and without children. In Costa Rica, where there are reimbursable tax credits to families, the negative personal average tax rate exists at earnings levels up to the fourth income decile.
Cash benefits are provided to families in 5 countries in the region; Argentina, Brazil, Chile, Colombia and Uruguay. In the case of Brazil, these benefits cease for the one-earner married couple at an earnings level in the fifth income decile. In the other 4 countries, this position is not reached until the ninth or tenth income decile.
For both family types, in the cases of Brazil, El Salvador, Honduras, Jamaica, Trinidad and Tobago and Uruguay, the average payments burden attributed to employee social security contributions declines in the last decile of income. The same applies to employer social security contributions. However, at these income levels, individuals have also started to pay income tax, which contributes to increases in the tax wedge and the net personal average rate as earnings rise. In most countries, workers start to pay income tax at earnings levels in the eighth, ninth and tenth income deciles. The exceptions are El Salvador and Mexico where payments of income tax start in the seventh and fifth income deciles respectively.
The marginal tax wedge is relatively flat throughout the labour income distribution for most countries for two reasons. These are the existence of proportional social security systems and also because income tax payments only commence at the upper deciles of the labour income distribution. The cases of Honduras and Trinidad and Tobago are special since the marginal tax wedge is zero before becoming positive at the higher levels of income; the tenth and ninth deciles respectively. This is because, at the specific earnings levels focussed in the chart, there is no change in the payment of employee social security contributions for a one unit increase in labour income The marginal tax wedge is therefore only shown as positive when the income tax comes into play at very high levels of income.
For most countries, the marginal tax wedge becomes positive in the first or second income deciles. Costa Rica, Honduras, Nicaragua, Peru and Trinidad and Tobago are the exceptions starting at the fifth, seventh, third, fourth and eighth levels of decile income respectively.
In Paraguay and Venezuela, the marginal tax wedge appears to be constant throughout the income distribution for the one-earner married couple. In Paraguay, the same is true for the single worker. This is because the income tax payments commence at earnings levels higher than the average earnings in the tenth income decile.
Note
← 1. Some of the graphs have bars where the average tax wedge is shown but not the net personal average tax rate. In these cases the two measures are the same. The same point applies to the figures showing the marginal tax wedge and the net personal marginal tax rate.