3. Effective tax rates on labour income in 2023
The effective tax rates on labour income in 2023 calculated for the eight model household types are presented in Tables 3.1 to 3.13 and Figures 3.1 to 3.7. The household types vary by marital status, number of children and economic status. For each household type, the chapter presents different indicators for the average rates (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 OECD countries in 2023, which combines personal income tax, employee and employer social security contributions (SSCs) while also taking into account cash benefits to which each household type was entitled. Total taxes due minus transfers received are expressed as a percentage of labour costs, defined as gross wage plus employer SSCs (including payroll taxes). In the case of a single person on the average wage (AW), the tax wedge ranged from zero (Colombia) and 7.1% (Chile) to 47.9% (Germany) and 52.7% (Belgium). For a one-earner married couple with two children, at the average wage level, the tax wedge was lowest in Colombia (-4.9%) and highest in France (39.1%) and Finland (39.8%). 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. The tax wedge for a single parent with two children, earning 67% of the AW, was negative in New Zealand (-12.1%) and Colombia (-7.3%). Negative tax wedges occur when the cash benefits received by families, plus any applicable non-wastable tax credits, exceed the sum of the total tax and social security contributions that are due.
Table 3.2 and Figure 3.2 combine personal income tax and employee SSCs in 2023, 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 levels of tax plus SSCs were seen in Lithuania (37.8%) and Belgium (39.9%). The lowest average rates were in Colombia (0.0%), Chile (7.1%), Costa Rica (10.7%), Mexico (11.0%), Korea (16.2%), Switzerland (18.6%), Israel (18.8%), Estonia (18.9%) and Czechia (20.0%).
Table 3.3 shows personal income tax and employee SSCs, reduced by the entitlement to cash benefits, for each household type in 2023. Figure 3.3 illustrates this 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 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 2023. In New Zealand, France and Estonia, these represented more than 25% of gross earnings (28.4%, 27.9% and 26.5%, respectively). Thirty-two countries provided cash benefits for a one-earner married couple with two children earning the average wage, although these were less generous relative to income, ranging up to 14.2% in Poland. The lower level of cash benefits for the married couple may be attributable to three factors: single parents may be eligible for more generous treatment; the benefits may be fixed in absolute amount; or the benefits may be subject to means testing.
Table 3.4 shows personal income tax due as a percentage of gross wage earnings in 2023. For single persons without children at the average wage (column 2), the income tax burden ranged from 0.0% (Colombia and Costa Rica) to 36.0% (Denmark). In most OECD countries, at the average wage level, the income tax burden for one-earner married couples with two children was lower than that for single persons (compare columns 2 and 5). These differences are illustrated in Figure 3.4. In eleven 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 (Austria, Chile, Czechia, Germany, Luxembourg, Poland, Portugal, the Slovak Republic, Slovenia, Switzerland and the United States). There was no difference in a further ten countries: Australia, Colombia, Costa Rica, Finland, Lithuania, Mexico, New Zealand, Norway, Sweden and Türkiye. In Colombia and Costa Rica, neither a single worker on the average wage nor a one-earner married couple at the average wage paid personal income taxes.
There were three OECD countries where the personal income tax rate for a married worker at the average wage with two children was negative in 2023: Poland (-1.1%) Czechia (-6.4%) and Slovak Republic (-14.1%). This was due to the presence of non-wastable tax credits, whereby credits were paid in excess of the taxes otherwise due. Similarly, single parents with two children earning 67% of the average wage showed a negative tax burden in eight countries: Austria, Czechia, Germany, Israel, Poland, the Slovak Republic, Spain and the United States. In three other countries – Chile, Colombia and Costa Rica – this household type paid no income tax.
Comparison of columns 5 and 6 in Table 3.4 demonstrates that if the second spouse was employed at 67% of the average wage, the income tax burden of the household (now expressed as 167% of the average wage) would be slightly higher in 20 countries, the largest differences being in Germany (9.3 percentage points [p.p.]) and the Slovak Republic (12.0 p.p.). The income tax burden was lower in fifteen countries, the largest differences being in the Netherlands (-4.7 p.p.), Finland and Israel (both -3.1 p.p.). There was no impact on the tax burden in Chile, Colombia or 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 counterpart 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 2023. In Colombia, neither the average single worker nor their counterpart at 167% of the average wage paid personal 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, Costa Rica and Hungary. 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 three OECD countries: Chile (0.0%), Costa Rica (0.0%), and the Netherlands (23.1%).
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 rate including SSCs for single individuals at 67% of the average wage level was only 31.8% lower than their counterparts at 167%, compared to the OECD average tax savings of 47.3% for personal income taxes alone in 2023. 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 32.7% for the personal income tax to 20.2% for the personal average tax rate 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 2023. 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 on all earnings, without a minimum earnings threshold. Although a number of OECD member countries apply a ceiling to SSCs, this usually applies to wage levels higher than 167% of the AW. As a result, the contribution on earnings tends to be flat between 67% and 167% of average wage for most countries. A constant proportional burden for employee SSCs for the eight household types was observed in Slovenia (22.1%), Lithuania (19.5%), Hungary (18.5%), Poland (17.8%), Türkiye (15.0%), Greece (13.9%), the Slovak Republic (13.4%), Czechia and Portugal (both 11.0%), Costa Rica (10.7%), Latvia (10.5%), Norway (7.9%), the United States (7.7%), Chile (7.0%), Spain (6.5%), Ireland (4.0%) and Estonia (1.6%). In addition, at the average wage level, Belgium and Germany imposed different levels of SSCs on employees according to their family status (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 2023. 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 earning the average wage without children in 2023. However, in six OECD countries, these individuals faced marginal wedges above 55%: Finland (57.2%), Luxembourg (57.9%), France (58.2%), Austria (58.8%), Italy (62.6%) and Belgium (65.0%). By contrast, Chile (10.3%) had the lowest marginal tax wedge in 2023. For Colombia, no income tax was paid at the average wage level in 2023 while SSCs are considered as non-tax compulsory payments and are thus not included in the Taxing Wages calculations.2
In twenty-seven OECD member countries, the marginal tax wedge for a one-earner married couple at average earnings with two children was either the same as that for a single worker at average wage with no children or within 5 p.p. thereof. The marginal tax wedge was more than 5 p.p. points lower for one-earner married couples in seven countries: France (16.2 p.p.), Luxembourg (12.5 p.p.), the United States (9.3 p.p.), Germany (7.4 p.p.), Slovenia (6.7 p.p.), Switzerland (6.2 p.p.) and Portugal (6.1 p.p.). In contrast, the marginal rate for one-earner married couples with two children was more than 5 p.p. higher than for single workers with no children in Canada (5.5 p.p.), the Netherlands (5.6 p.p.), Iceland (9.0 p.p.) and New Zealand (27.0 p.p.). 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 2023. As with the marginal tax wedge (Table 3.6), personal income tax and employee SSCs absorb between 25% and 55% of a worker’s pay rise for single individuals without children at the average wage level in most countries. The marginal tax rate for the average worker was higher than 55% only in Belgium (55.6%) and lower than 25% in Chile (10.3%), Costa Rica (10.7%), Mexico (19.4%) and Korea (23.5%). As previously mentioned, no income tax was paid in Colombia at the average wage while SSCs are considered as non-tax compulsory payments.
In twenty-seven 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 as or within 5 p.p. of that for single persons with no children. The marginal rate was more than 5 p.p. lower for the one-earner married couples in seven countries: France (22.1 p.p.), Luxembourg (14.3 p.p.), the United States (10.0 p.p.), Germany (8.2 p.p.), Slovenia (7.8 p.p.), Portugal (7.5 p.p.) and Switzerland (6.6 p.p.). In contrast, the marginal rate for one-earner married couples with two children was more than 5 p.p. higher than it was for single persons with no children in Canada (5.7 p.p.), the Netherlands (6.2 p.p.), Iceland (9.6 p.p.) and New Zealand (27.0 p.p.). Similar to the marginal tax wedges, these higher net personal 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 2023, 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 2023 were found in New Zealand (0.45), Belgium and Italy (both 0.56), Ireland (0.59) and the Netherlands (0.60). In contrast, Chile (0.99), France (0.95) and Mexico (0.90) 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 2023.4 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. The elasticity was below 0.50 for single parents earning 67% of the average wage level in Spain (0.5), Luxembourg (0.47), Australia and the Netherlands (both 0.45), Belgium (0.44), New Zealand (0.38), the United Kingdom (0.32), France (0.31) and Canada (0.22) and for one-earner married couples at the average wage level with two children in New Zealand (0.45). In contrast, the elasticity was between 0.98 and 1.0 for most household types in Costa Rica and Chile and some household types in Canada, Colombia, Germany and Hungary, and one household type in Estonia and Lithuania for the single worker earning 167% of the average wage (1.0). Using this elasticity measure, the income tax system was regressive for a single individual at 167% of the average wage in Mexico (1.01), Germany (1.04) and Austria (1.08), and for a single individual at 100% of the average wage in Mexico (1.01).
Table 3.10 and Table 3.11 set out gross wage earnings and net income for the eight household types in 2023, after all amounts have been converted into U.S. dollars with the same purchasing power. Single workers earning the average wage had a net income above USD 50 000 in fourteen countries: Switzerland (USD 81 465), Norway (USD 59 594), the Netherlands (USD 56 816), Korea (USD 55 956), Luxembourg (USD 55 929), Iceland (USD 55 620), Ireland (USD 55 475), Canada (USD 54 408), the United Kingdom (USD 52 790), Denmark (USD 52 734), Australia (USD 52 668), Austria (USD 51 228), Germany (USD 50959) and the United States (USD 50 954) (Table 3.10 column 4). The lowest levels (below USD 20 000) were in Mexico (USD 14 998) and Colombia (USD 16 615). In the case of a one-earner married couple with two children at the average wage level, families had net incomes above USD 60 000 in Austria, Belgium, Canada, Denmark, Germany, Iceland, Ireland, Korea, Luxembourg, the Netherlands, Norway and Switzerland, with the lowest level again being in Colombia and Mexico (Table 3.11). With the exceptions of Costa Rica, Mexico and Türkiye, the net income for the one-earner married couple in OECD countries was higher than for 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 2023. 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 Iceland (USD 81 460), Denmark (USD 82 890), France (USD 83 034), Ireland (USD 85 515), the Netherlands (USD 87 599), Norway (USD 93 654), Luxembourg (USD 95 331), Austria (USD 97 182), Germany (USD 97 722), Belgium (USD 103 494) and Switzerland (USD 106 452), and lowest (less than USD 30 000) in Colombia (USD 16 615), Mexico (USD 18 743) and Chile (USD 29 325). Annual labour costs are equal to annual gross wage in Chile, Colombia 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 and Colombia 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 2023 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 2023 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 2023 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 2023 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 2023 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 2023 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 2023 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.