5. 2020 tax burdens (and changes to 2021)
The chapter presents the results of tax burden measures on labour income for the eight model household types for 2020. 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 2021. This chapter compares the two sets of tables and analyses changes in the tax burdens between 2020 and 2021.
The following commentary on the changes in tax burdens and marginal tax rates between 2020 and 2021 focuses on two of the eight household types covered by the Taxing Wages models: 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 columns 1, 3-4 and 6-8 of the tables give corresponding results for the six other household types. Generally, only those changes exceeding one percentage point for average effective rates and five percentage points for marginal effective rates are flagged in this chapter. Most of these were due to tax reforms or changes in the tax systems. Further information on countries’ tax systems is given in Part II of the Report, entitled “Country details, 2021”.
Table 5.1 presents the total tax wedge (calculated as personal income tax plus employee and employer’s social security contributions [SSCs] less cash benefits) by household type as a percentage of labour costs (gross wage plus employers’ SSCs [including payroll taxes]) in 2020. In the majority of countries, changes in the gap between total labour costs and the corresponding net take-home pay in 2021 as compared with 2020 were within plus or minus one percentage point.
Comparing column 2 in Tables 3.1 and Table 5.1, the OECD average tax wedge remained unchanged at 34.6% in 2020 and 2021 for a single average worker. It fell by more than one percentage point in the Czech Republic (4.1 percentage points), Greece (2.2 percentage points), Latvia (1.7 percentage points) and Australia (1.3 percentage points). In the Czech Republic, the decrease was the result of the change in the PIT tax base in 2021, from employment income including employer SSCs to gross income only. In Greece, the decrease was mainly due the suspension of the Solidarity contribution payments for workers in the private sector in response to the COVID-19 crisis and due to lower employer and employee SSC rates. In Latvia, the decrease was driven by an increase in tax allowances and lower personal income taxes as well as reduced employer and employee SSC rates. In Australia, the decrease was due to an increase in income thresholds within the income tax brackets, leading to a larger proportion of income being taxed at a lower rate compared to 2020, and lower payroll taxes in 2021 than in 2020. The average tax wedge increased by one percentage point or more in Finland (1.3 percentage points), the United States (1.2 percentage points) and Israel (1.0 percentage point). In Finland, the increase was due to an increase in the SSC rate and higher income taxes. In the United States, the average tax wedge increased due to the combined effect of higher PIT and lower cash benefits. In Israel, the tax wedge increased as result of the removal of the one-time earned income tax credit (EITC) bonus delivered in 2020 as a response to the COVID-19 crisis.
For one-earner married couples (comparing column 5 of Tables 3.1 and 5.1), the OECD average tax wedge decreased by 0.4 percentage points between 2020 and 2021, from 25.0% to 24.6%. Decreases of more than one percentage point were observed in five countries – Australia, Chile, the Czech Republic, Greece and the United States. In Chile (-25.5 percentage points), the tax wedge decreased due to the introduction of the temporary Emergency Family Income (Ingreso Familiar de Emergencia) cash transfer, which increases with the number of household members. In the Czech Republic (5.0 percentage points), the tax wedge decreased due to the change in the personal income tax base. In Greece (2.4 percentage points), the removal of the Solidarity contribution payments for workers in the private sector and lower SSC rates, as already mentioned, led to the decrease in the tax wedge. In Australia (1.7 percentage points), the tax wedge decreased due to the increase in income thresholds within the income tax brackets as well as lower payroll taxes. In the United States (1.6 percentage points), the average tax wedge decreased as a result of higher refundable child tax credits and a reduction of the employer Michigan unemployment insurance contribution rate (from 3.06% in 2020 to 2.9% in 2021).
Table 5.2 shows the combined burden of personal income tax and employee SSCs in the form of personal average tax rates as a percentage of gross wage earnings in 2020. For single workers on the average wage, it decreased by more than one percentage point between 2020 and 2021 in Mexico (1.021 percentage points), in Greece (1.51 percentage points), Latvia (1.85 percentage points) and the Czech Republic (5.51 percentage points). For one-earner couples with two children, personal average tax rates decreased by more than one percentage point in Mexico (1.02 percentage points), Greece (1.64 percentage points), the United States (2.52 percentage points) and the Czech Republic (4.98 percentage points). In Mexico, the personal average rate decreased as result of changes in the income tax schedule. In Greece, decreases were the result of the suspension of the Solidarity contribution payments and lower employee SSC rates already mentioned. In the United States, decreases were mostly due to the higher refundable child tax credits. In the Czech Republic, the decrease occurred due to the change of the personal tax base in 2021 from employment income including employer SSCs to gross income only. The personal average tax rate as percentage of wage earnings increased by 1.0 percentage point in Israel for the average worker earning 100% of the average wage as well as for the one-earner married couple with two children due to the removal of the one-time EITC. It also increased by 1.26 percentage points for the one-earner married couple in Estonia due to lower tax allowances as a result of higher income.
Table 5.3 provides the combined burden of personal income tax and employee SSCs less the amount of cash benefits as a percentage of gross wage earnings in 2021. 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 2020 and 2021 in Mexico (1.02 percentage points), Greece (1.51 percentage points), Latvia (1.85 percentage points) and the Czech Republic (5.51 percentage points). For one-earner couples with two children, the net personal average tax rates decreased by more than one percentage point in six countries: Mexico (1.02 percentage points), Australia (1.30 percentage points), Greece (1.64 percentage points), the United States (1.67 percentage points), the Czech Republic (6.74 percentage points) and Chile (25.52 percentage points). The reasons for these changes are discussed above.
Table 5.4 presents information on personal income tax as a percentage of gross wage earnings in 2020. 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 2020 and 2021 for most OECD member countries. The OECD average personal income tax rate decreased by 0.06 percentage points to 14.94%. For the single worker on average wage, the average personal income tax rate decreased by more than one percentage point in Mexico and Germany (both by 1.01 percentage points), Latvia (1.35 percentage points) and the Czech Republic (5.51 percentage points). In Germany, the decrease was the result of higher thresholds for the payment of the solidarity tax, as a result of which 90% of tax payers no longer paid this tax. The personal income tax rate decreased in Mexico, Latvia and the Czech Republic for the reasons already mentioned.
For the one-earner couples with two children, changes to the average personal income tax rate were also minor in most OECD countries between 2020 and 2021. The OECD average dropped by 0.03 percentage points to 9.92%. Nevertheless, there were decreases of more than one percentage point for this household in three countries – Mexico (1.01 percentage points), the United States (2.52 percentage points) and the Czech Republic (4.98 percentage points). Decreases in Mexico and the United States were due to the reasons mentioned previously.
Table 5.5 provides information on employee SSCs as a percentage of gross wage earnings in 2020. Comparing columns 2 and 5 of Tables 3.5 and 5.5, there was only one change larger than one percentage point for both the single worker and the one-earner married couple between 2020 and 2021; this occurred in Greece (1.39 percentage points) and was a result of the reduction in employee SSC rates between 2020 and 2021. No changes were recorded in 25 out of the 38 OECD countries, and changes ranged from -0.55 to 0.44 percentage points in the remaining countries.
Table 5.6 shows the marginal tax wedge (rate of personal income tax plus employee and employer SSCs and payroll taxes where applicable minus cash benefits) as a percentage of labour costs, when the gross wage earnings of the principal earner rose by 1 currency unit in 2020. Comparing columns 2 and 5 respectively in Tables 3.6 and 5.6, changes between 2020 and 2021 in the marginal tax wedge were generally smaller than 5 percentage points, the exceptions being Norway (8.02 percentage points for both household types), Israel (10.22 percentage points for both household types), the Czech Republic (-15.00 percentage points for the one-earner married couple) and France (-22.53 percentage points for the one-earner married couple).
In Norway, the marginal tax wedge increased because income thresholds for the personal income tax increased less in 2021 than they did in 2020. In Israel, taxable income at the average wage was in a higher income tax bracket, resulting in a higher marginal personal income tax rate in 2021. In the Czech Republic, the marginal tax wedge decreased because the principal earner received the full amount of the refundable child credit in 2021 as the tax liability was fully exhausted by other wastable tax credits; the principal earner only received a residual of the refundable child tax credit in 2020. In France, the marginal tax wedge decreased as the in-work benefit, which was equal to 0 in 2021, remains unchanged when the worker’s income is increased by 1 EUR while the in-work benefit decreased in 2020 when income increased.
Table 5.7 presents the marginal rate of personal income tax plus employee SSCs minus cash benefits (the net personal marginal tax rate) by household type and wage level, when the gross wage earnings of the principal earner rose by 1 currency unit in 2020. Comparing columns 2 and 5 respectively in Tables 3.7 and 5.7, the pattern of changes between 2020 and 2021 in the net personal marginal tax rates was similar to that for the marginal tax wedge discussed above. Changes outside the range of plus or minus five percentage points were observed in Israel (+11.00 percentage points for both household types), Norway (+9.00 percentage points, both household types), Canada (-5.0 percentage points for the one-earner married couple), the Czech Republic (-20.07 percentage points for the one-earner married couple and -5.07 percentage points for the single worker) and France (-30.72 percentage points for the one-earner married couple). The changes in the net personal marginal tax rates for the Czech Republic, Israel, France and Norway resulted from changes to the marginal personal income tax rates explained in the previous paragraph. In Canada, the net personal marginal tax rate decreased because the one-earner married household no longer received an additional cash benefit, which was paid in 2020 but not in 2021; as a result, the marginal rate did not capture the withdrawal effect of the additional benefit.
Table 5.8 shows the percentage increase in net income relative to the percentage increase in gross wages when the latter increased by 1 currency unit in 2020.2 Table 5.9 shows 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.3 The results shown in these two tables are directly dependent upon the marginal and average tax rates 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 2020.
Notes
← 1. 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.
← 2. 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.
← 3. 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.