Chapter 5. 2017 tax burdens (and changes to 2018)
The chapter presents the results of tax burden measures on labour income for the eight model household types for 2017. 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 2018. This chapter compares the two sets of tables and analyses the changes in tax burden between 2017 and 2018.
The following commentary on the changes in tax burdens and marginal tax rates between 2017 and 2018 focuses on two of the eight household types – single employees, without children, at the average wage (column 2 of the tables) and one-earner married families, with two children, at the average wage (column 5). Comparisons with the columns 1, 3-4 and 6-8 of the tables give corresponding results for the six other household types. Generally, only those changes exceeding 1 percentage point for average effective rates and 5 percentage points for marginal effective rates are flagged in this chapter. Most of these are due to tax reforms or changes in the tax systems. Further detailed information on the countries’ tax systems is given in the Part II of the Report that is entitled “Country details, 2018”.
Table 5.1 presents the total tax wedge (described as personal income tax plus employee and employer’s social security contributions less cash benefits) by household type as a percentage of labour costs (gross wage plus employers’ social security contributions [including payroll taxes]). In the majority of countries, changes in the gap between total labour costs and the corresponding net take-home pay in 2018 as compared with 2017 were within plus or minus one percentage point.
Comparing column 2 in Tables 3.1 and 5.1, the OECD average tax wedge decreased by 0.16 percentage points from 36.22%1 to 36.06% for a single average worker between 2017 and 2018. It fell by more than one percentage point in Belgium (1.1 percentage point), Estonia (2.5 percentage points), Hungary (1.1 percentage points) and the United States (2.2 percentage points). In Belgium and Hungary, the decreases in the tax wedge were mostly driven by lower employer social security contributions, in respect of which the total contribution rate was reduced from 32.19% to 27.14% in Belgium and from 22.0% to 19.5% in Hungary. During the same year, in Estonia, the basic tax allowance was increased and became income-tested, resulting in lower personal income taxes being payable. With regards to the decrease in the tax wedge in the United States, it resulted from the combined effect of a higher basic tax allowance and the reformed income tax schedule (i.e. lower marginal income tax rates). In contrast, there were no increases in the tax wedge of more than one percentage point for the single average worker across the OECD member countries.
For one-earner married couples (comparing column 5 of Tables 3.1 and 5.1) the OECD average tax wedge remained at 26.6% between 2017 and 2018, although changes of more than one percentage point were observed in eight countries: Belgium, Estonia, Greece, Hungary, Lithuania, New Zealand, Poland and the United States. The tax wedge increased by more than one percentage point in Poland (10.3 percentage points) only, because of reduced income-tested child benefit payments. The decreases in the tax wedge for the one-earner couple with two children in Belgium (1.1 percentage point), Estonia (2.4 percentage points), Hungary (1.1 percentage point) and the United States (2.4 percentage points) were largely due to changes noted in the previous paragraph. In addition, the decreases also resulted from increases in the cash benefit in Estonia, and from an increase in tax reliefs for dependent children for Hungary (i.e. increased child tax allowance for households with two children) and the United States (i.e. increased refundable and non-refundable portions of the child tax credit). The decreases were mostly driven by changes in cash benefits or tax provisions for dependent children in Greece (by 1.1 percentage point due to increased child benefits), Lithuania (by 2.5 percentage points due to the introduction of a non-means-tested universal child benefit in 2018) and New Zealand (by 4.5 percentage points due to the increased Family Tax Credit which is treated as a cash benefit in the report).
Table 5.2 shows the combined burden of personal income tax and employee social security contributions in the form of personal average tax rates as a percentage of gross wage earnings. For single persons on average wage, it decreased by more than one percentage point between 2017 and 2018 in Estonia (3.4 percentage points), Latvia (1.0 percentage point) and the United States (2.3 percentage points). In Latvia, a tax allowance was introduced and the flat tax rate changed to a progressive income tax schedule in 2018 (i.e. a lower marginal tax rate was applied at the average wage level). There were no increases of more than one percentage point in the personal average tax rates for single average workers. In contrast, the personal average tax rate increased by more than one percentage point for one-earner married couples with two children in the Czech Republic (1.1 percentage point) and Lithuania (6.5 percentage points). In the Czech Republic, the average wage increased faster than the sum of the tax credits for this household type, causing higher personal income tax in 2018. In Lithuania, the tax allowance for children was abolished in 2018 and replaced with a universal child benefit. The benefit is not considered in Table 5.2, but is included in the calculations for Table 5.3. The personal average tax rate decreased by more than one percentage point in Estonia (3.0 percentage points) and in the United States (2.6 percentage points) for the one-earner married couples with two children for the reasons given previously.
Table 5.3 provides the combined burden of personal income tax and employee social security contributions less the amount of cash benefits as a percentage of gross wage earnings. This is the measure of the net personal average tax rate. Comparing column 2 of Tables 3.3 and 5.3, for single persons on average wage, there was a change of more than one percentage point between 2017 and 2018 only in Latvia (-1.03 percentage points), Estonia (-3.4 percentage points) and the United States (-2.3 percentage points) as a result of lower personal income tax in 2018. Comparing column 5 of Tables 3.3 and 5.3, increases in the net personal average tax rate of one-earner married couples with two children exceeding one percentage point occurred in Canada (1.2 percentage points), Norway (1.01 percentage point), Poland (12.0 percentage points) and the Slovak Republic (1.2 percentage points). In Poland, the large increase in the net personal average rate resulted from lower cash benefit payments. In fact, the Family 500 Plus programme was paid for only one of the two children because the household’s income exceeded the benefit income limit in 2018.
Table 5.4 presents information on personal income tax due as a percentage of gross wage earnings. Comparing column 2 of Tables 3.4 and 5.4, in most OECD member countries, the average personal income tax rates for single persons on average wage changed only slightly between 2017 and 2018 and the OECD average personal income tax rate decreased by 0.1 percentage point to 15.7%. The average personal income tax rate increased by more than one percentage point only in France (2.0 percentage points) as a result of an increase of 1.7 percentage points in a surtax (Contribution Sociale Généralisée) which increased in rate from 7.5% to 9.2%. In contrast, it decreased by more than one percentage point in Estonia (3.4 percentage points), Latvia (1.5 percentage points) and the United States (2.3 percentage points) due to income tax reforms (i.e. newly introduced or increased existing tax allowances and/or lower marginal income tax rates). Comparing column 5 of Tables 3.4 and 5.4, the OECD average personal income tax rate for the one-earner married couples with two children, which was 10.2% in 2017, increased by 0.2 percentage points in 2018. For that household type, there were increases of more than one percentage point in Czech Republic (1.1 percentage point), France (1.7 percentage points) and Lithuania (6.5 percentage points). In contrast, the average personal income tax rates decreased by more than one percentage point in Estonia (3.0 percentage points) and the United States (2.6 percentage points).
Table 5.5 shows information on employee social security contributions as a percentage of gross wage earnings. Comparing columns 2 and 5 of Tables 3.5 and 5.5, there were no changes of more than one percentage point between 2017 and 2018 for either of these household types in most OECD member countries, the exception being France. In France, the employee social security contributions as percentage of gross wage earnings decreased by 2.4 percentage points for both household types as the contribution rates were reduced (i.e. a reduced unemployment contribution rate was applied from January to September 2018 and then abolished) or abolished (contributions for illness, pregnancy, disability and death) in 2018. The OECD average employee social security contribution rate remained unchanged at 9.76%2 for the single average workers and slightly decreased by 0.04 percentage points to 9.72% for the one-earner married couples with two children during that period.
Table 5.6 shows the marginal tax wedge (rate of personal income tax plus employee and employer social security contributions and payroll taxes where applicable minus cash benefits) as percentage of labour costs, when the gross wage earnings of the principal earner rises by 1 currency unit in 2017. Comparing columns 2 and 5 respectively in Tables 3.6 and 5.6, changes between 2017 and 2018 in the marginal tax wedge were generally within the range of plus or minus 5 percentage points. There were changes of more than 5 percentage points in four OECD countries: Australia (-18.9 percentage points for the one-earner married couple with two children), Estonia (+8.3 percentage points for the two household types), Italy (+7.0 percentage points for the two household types) and Portugal (+6.9 percentage points for the one-earner married couple with two children). In Australia, the large decrease in the marginal tax wedge was due to the tapering of the cash benefit (Family Tax Benefit Part A) that did not occur in 2018 but did occur in 2017. As a result, no withdrawal effect of the cash benefit was captured in the marginal tax wedge for 2018, which was consequently lower than in 2017.
Table 5.7 presents the marginal rate of personal income tax plus employee social security contributions minus cash benefits (the net personal marginal tax rate) by household type and wage level, when the gross wage earnings of the principal earner rise by 1 currency unit in 2017. Comparing columns 2 and 5 respectively in Tables 3.7 and 5.7, the pattern of changes between 2017 and 2018 in the net personal marginal tax rates were similar to that for the marginal tax wedge discussed above. Changes outside the range of plus or minus 5 percentage points were in Australia (-20.0 percentage points for the one-earner married couple with two children), Estonia (+11.1 percentage points for the two household types), Italy (+9.2 percentage points for the two household types), Latvia (+5.7 for the two household types) and Portugal (+8.5 percentage points for the one-earner married couple with two children).
Table 5.8 shows the percentage increase in net income relative to the percentage increase in gross wages when the latter increases by 1 currency unit.3 Table 5.9 provides 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.4 The results shown in these two tables are directly dependent upon the marginal and average tax rates that have been discussed in the paragraphs above. Table 5.10 and Table 5.13 report background information on levels of labour costs plus gross and net wages in 2017.
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Table 5.6. Marginal rate of income tax plus employee and employer contributions less cash benefits, 2017
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Table 5.9. Percentage increase in net income relative to percentage increase in gross labour cost, 2017
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Notes
← 1. Tables 5.1 to 5.7 show figures rounded to the first decimal. The text may present figures rounding to two decimal points for accuracy purposes.
← 2. Tables 5.1 to 5.7 show figures rounded to the first decimal. The text may present figures rounding to two decimal points for accuracy purposes.
← 3. 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.
← 4. 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.