Chapter 4. Graphical exposition of the 2018 tax burden
The chapter presents a graphical exposition of the tax burdens on labour income in 2018 for gross wage earnings ranging from 50% to 250% of the average wage. These are illustrated in separate graphs for each of four household types and for each OECD member country. The household types are single taxpayers without children; single parents with two children; one-earner married couples without children and one-earner married couples with two children.
The graphs are divided in two sets showing the average and the marginal tax wedge components as percentage of total labour costs (central and local income taxes; employee and employer social security contributions and cash benefits). The graphs also show the net personal average and marginal tax rates.
The graphs in this section show the tax burden on labour income in 2018 for gross wage earnings between 50% and 250% of the average wage (AW). For each OECD member country, there are separate graphs for four household types: single taxpayers without children, single parents with two children, one-earner married couples without children and one-earner married couples with two children. The net personal average and marginal tax rates ([the change in] personal income taxes and employee social security contributions net of cash benefits as a percentage of [the change in] gross wage earnings) are included in the graphs that show respectively the average and the marginal tax wedge.1
The graphs illustrate the relative importance of the different components of the tax wedges: central government income taxes, local government income taxes, employee social security contributions, employer social security contributions (including payroll taxes where applicable) and cash benefits as a percentage of total labour costs. It should be noted that a decreasing share in total labour costs implies that the values of tax payments less benefits are not increasing as rapidly as the corresponding total labour costs. It does not necessarily imply that the values of payments less benefits are decreasing in cash terms.
Low-income households are treated favourably by the tax-benefit system in many OECD countries. Negative central government income taxes are observed in Belgium because of the non-wastable tax credits for low income workers and for dependent children; in Canada2 because of the non-wastable working income tax benefit; in the Czech Republic, Germany, the Slovak Republic and the United Kingdom because of non-wastable child tax credits; in Israel because of the non-wastable earned income tax credit (EITC) for families with children (since 2016, single parents have been eligible for the EITC for a wider income range); in Italy because of the Fiscal Bonus targeting low income workers; in Latvia because of a non-wastable tax credit calculated on the over-paid tax of the previous year, which was introduced in 2016; in Luxembourg and Spain because of non-wastable tax credits for single parents; in Mexico3 because of the non-wastable employment subsidy credit; in Poland because of a conditional refundable child tax credit since 2015 and in the United States because of the non-wastable EITC and the child tax credit. Concerning Sweden, the charts show negative central government income taxes due to an EITC. However, the tax credit is wastable in the sense that it cannot reduce the total individual’s tax payments to less than zero. As a matter of fact, the EITC is also deducted from the local government income tax.
When cash benefits are also taken into account, single parents and/or one-earner married couples with two children do not pay income taxes and employee social security contributions at income levels between 50% and 100% of the AW in twenty-one OECD member countries. For example, the net personal average tax rate becomes positive in Canada at 97% of the AW for the single parent and 98% of the AW for the one-earner couple with children, in Estonia at 96% of the AW for the single parent and 95% of the AW for the one-earner couple with children, in New Zealand at 97% of the AW for the single parent and the one-earner couple with two children and in Poland at 96% of the AW for the one-earner couple with children. In the Czech Republic, Israel, the Slovak Republic and the United Kingdom, the negative net personal average tax rates resulted from the combined effect of refundable tax credits and cash benefit payments. In contrast, the net personal average tax rate for single parents or one-earner couples with children were negative mainly due to refundable tax credits in Spain (up to 63% of the AW for the single parent) and the United States (up to 64% of the AW for the single parent and 72% of the AW for the one-earner couple with children).
There are large variations in cash benefit levels across OECD countries. They represent about a quarter or more of total labour costs for low-income single parents and/or one-earner married couples with two children in Australia, Canada, Denmark, France, Ireland, New Zealand, Poland and Slovenia.
The marginal tax wedge is relatively flat across the earnings distribution in some countries because of the flat social security contribution and personal income tax rates. Single taxpayers without children face a flat marginal tax wedge all over the 50% to 250% of AW income range in the Czech Republic (48.6%) and Hungary (45.0%). The marginal tax wedge is also relatively constant in Iceland, Lithuania and the United Kingdom. In Iceland, the marginal tax wedge is 39.5% on earnings below 122% of the AW and then 47.9% on earnings from 123% of the AW to 250% of the AW. In Lithuania, it is 47.8% on earnings below 125% of the AW and 42.1% from 126% of the AW to 250% of the AW. In the United Kingdom, it is 40.2% on earnings below 117% of the AW and then 49.0% on earnings between 118% and 250% of the AW.
Social security contributions are levied at flat rates in many OECD countries. Some countries have an earnings ceiling above which no additional social security contributions have to be paid. The variations in the marginal social security contributions are in general the same for the four household types, since the contribution rates or income ceilings do not vary depending on the marital status or the number of dependent children. Nevertheless, in Hungary the marginal employee social security contributions are higher for the families with children, at low income levels, due to the impact of the withdrawal of the child tax allowance with increasing earnings. Families whose combined personal income tax base is not sufficient to claim the maximum amount of the family tax allowance can deduct the remaining sum from the health insurance and pension contributions.
Within the income range of 50% to 250% of the AW, the marginal employer social security rates fall to zero as a result of income ceilings in Germany (at 155% of the AW), Luxembourg (at 202% of the AW), the Netherlands (at 111% of the AW) and Spain (169% of the AW). The marginal employee social security rates fall to zero in Austria (at 153% of the AW), Canada (at 105% of the AW), Germany (at 155% of the AW), Spain (at 169% of the AW) and Sweden (at 112% of the AW).
In addition, taxpayers experience declining marginal employee and/or employer social security contribution rates as percentage of total labour costs over some parts of the earnings range as income increases. This can be observed in Austria, Belgium, Canada, France, Germany, Japan, Korea, Luxembourg, the Netherlands, Poland, the Slovak Republic, Switzerland, the United Kingdom and the United States. Large decreases in the marginal rates as percentage of total labour costs were observed in Luxembourg where the marginal employee social security contribution rate drops from 10.92% to 1.40% on earnings above 203% of the AW, in the United Kingdom where the marginal employee social security contribution rate drops from 10.54% to 1.76% of earnings above 117% of the AW and in the United States where the marginal employer and employee social security contribution rates drop from 7.11% to 1.43% on earnings above 233% of the AW.
Taxpayers face marginal tax rates and wedges of about 70% or more in several of OECD countries at particular earnings levels. This is the case for taxpayers below the average wage without children in Austria, Belgium, France, Italy, Mexico, Portugal and Turkey. They also apply to families with children in Australia, Austria, Belgium, Canada, Chile, France, Greece, Ireland, Italy, Japan, Lithuania, Luxembourg, Mexico, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Turkey and the United Kingdom. In many countries, these high marginal tax rates are partly the result, as income rises, in reductions in benefits, allowances or tax credits that are targeted at low-income taxpayers.
The zigzag movement in the marginal tax burdens observed in some of the graphs arises when the changes in taxes, social security contributions, and/or cash benefits for small rises in income vary over the income range in a non-continuous way. This is the case because of rounding rules in Germany, Luxembourg, Sweden and Switzerland; and the discrete characteristics of the PAYE (Pay As You Earn) tax credit, the spouse tax credit and the child transfers in Italy.
Notes
← 1. The marginal tax wedges in the graphs are calculated in a slightly different manner than the marginal tax rates that are included in the rest of the Taxing Wages publication. In Taxing Wages, marginal rates are usually calculated by increasing gross earnings by one currency unit (except for the spouse in the one-earner married couple whose earnings increase by 33% of the average wage). However, the ‘+1 currency unit’ approach requires the calculation of marginal rates for every single currency unit within the income range included in the graphs. It otherwise would not be correct to draw a line through the different data points because the data for the income levels in between the different points would be missing. In order to reduce the required number of calculations, the marginal rates that are shown in the graphs are calculated by increasing gross earnings by 1 percentage point – each line in the graph therefore consists of 200 data points – instead of 1 currency unit.
← 2. Although it is not visible on the charts, the central government income tax was negative for income levels below 53% of the AW for the single parent and the couple with two children.
← 3. Although it is not visible on the charts, the central government income tax was negative for income levels below 54% of the AW for the single parent and the couple with two children.