3. Effective tax rates on labour income in 2022
The effective tax rates on labour income in 2022 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 2022, 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 employers’ SSCs (including payroll taxes). In the case of a single person on the average wage (AW), the tax wedge ranged from zero (Colombia) and 7.0% (Chile) to 47.8% (Germany) and 53.0% (Belgium). For a one-earner married couple with two children, at the average wage level, the tax wedge was lowest in Colombia (-4.8%) and highest in Finland and France (both at 39.2%). 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 (-16.1%) and Colombia (-7.2%). 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 2022, 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 contributions were seen in Germany (38.0%) and Belgium (40.3%). The lowest average rates were in Colombia (0.0%), Chile (7.0%), Costa Rica (10.5%), Mexico (11.3%), Korea (15.8%), Estonia (18.4%), Switzerland (18.5%), Israel (19.1%) and the Czech Republic (19.6%).
Table 3.3 shows personal income tax and employee SSCs, reduced by the entitlement to cash benefits, for each household type in 2022. 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 2022. In New Zealand and Denmark, these represented more than 25% of income (31.5% and 25.6%, 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 17.3% 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 income testing.
Table 3.4 shows personal income tax due as a percentage of gross wage earnings in 2022. For single persons without children at the average wage (column 2), the income tax burden ranged from 0.0% (Chile, Colombia and Costa Rica) to 35.5% (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, the Czech Republic, Germany, Hungary, Luxembourg, Poland, Portugal, the Slovak Republic, Slovenia, Switzerland and the United States). There was no difference in another eleven countries: Australia, Chile, Colombia, Costa Rica, Finland, Lithuania, Mexico, New Zealand, Norway, Sweden and Türkiye. In Chile, Colombia and Costa Rica, neither the single worker on the average wage nor the one-earner married couple at the average wage paid personal income taxes.
There were three OECD countries where the personal income tax rate including SSCs for a married average worker with two children was negative in 2022. This was due to the presence of non-wastable tax credits, whereby credits were paid in excess of the taxes otherwise due. This resulted in tax burdens of -3.0% in Poland and the Slovak Republic and -7.9% in the Czech Republic. Similarly, single parents with two children earning 67% of the average wage showed a negative tax burden in eight countries: Austria, the Czech Republic, 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 had a job that paid 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 21 countries, the largest differences being in the Czech Republic (8.3 percentage points) and Germany (9.7 percentage points). The income tax burden was lower in thirteen countries, the largest differences being in the Netherlands (-4.7 percentage points), Finland and Israel (both -3.1 percentage points). 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 counterparts 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 2022. In Colombia, neither the average single worker nor their counterparts 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 Chile, 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 five OECD countries: Chile (0.0%), Colombia (0.0%), Costa Rica (0.0%), Greece (22.0%) and the Netherlands (21.4%).
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 32.1% lower than their counterparts at 167%, compared to the OECD average tax savings of 48.1% for personal income taxes alone in 2022. 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 19.8% 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 2022. 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 at a flat rate on all earnings, i.e. without any exempt threshold. In a number of OECD member countries, a ceiling applies. However, this ceiling usually applies to wage levels higher than 167% of the AW. The flat rates result in a constant average burden of SSCs for most countries between 67% and 167% of average wage earnings. A constant proportional burden for employee SSCs for the eight model household types was observed in Slovenia (22.1%), Lithuania (19.5%), Hungary (18.5%), Poland (17.8%), Türkiye (15.0%), Greece (14.0%), the Slovak Republic (13.4%), the Czech Republic and Portugal (both 11.0%), Latvia and Costa Rica (both 10.5%), Norway (8.0%), the United States (7.7%), Chile (7.0%), Spain and Switzerland (both 6.4%), Ireland (4.0%) and Estonia (1.6%).
In addition, at the average wage level, Germany and the Netherlands imposed different levels of SSCs on employees according to their family status (see 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 2022. 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 on average wage without children in 2022. However, in seven OECD countries, these individuals faced marginal wedges above 55%: Finland (56.1%), Luxembourg (58.5%), Germany (58.4%), France (57.7%), Austria (59.5%), Italy (62.7%) and Belgium (68.7%). By contrast, Chile (7.0%) had the lowest marginal tax wedge in 2022. For Colombia, no income tax was paid at the average wage level in 2022 while SSCs are considered as non-tax compulsory payments and are thus not included in the Taxing Wages calculations.2
In twenty-six OECD member countries, the marginal tax wedge for one-earner married couples at average earnings with two children was either the same as that for single persons at average wage with no children or within 5 percentage points thereof. The marginal tax wedge was more than 5 percentage points lower for one-earner married couples in eight countries: France (16.4 percentage points), Luxembourg (12.5 percentage points), the Czech Republic (11.2 percentage points), the United States (9.3 percentage points), Poland (8.9 percentage points), Slovenia (6.7 percentage points), Germany (6.5 percentage points) and Switzerland (6.2 percentage points). In contrast, the marginal rate for one-earner married couples with two children was more than 5 percentage points higher than it was for single workers with no children in Canada (5.5 percentage points), the Netherlands (5.6 percentage points), Iceland (9.0 percentage points) and New Zealand (27.0 percentage points). 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 2022. As in the case of the tax wedge, in most cases personal income tax and employee SSCs absorb 25% to 55% of a worker’s pay rise for single individuals without children at the average wage level. The marginal tax rate for the average worker was higher than 60% only in Belgium (60.2%) and lower than 25% in Chile (7.0%), Costa Rica (10.5%), Mexico (19.5%) and Korea (23.4%). 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-six 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 percentage points of that for single persons with no children. The marginal rate was more than 5 percentage points lower for the one-earner married couples in nine countries: France (22.4 percentage points), the Czech Republic (15.0 percentage points), Luxembourg (14.2 percentage points), Poland (10.4 percentage points), the United States (10.0 percentage points), Slovenia and Germany (both 7.8 percentage points), Switzerland (6.6 percentage points) and Portugal (5.5 percentage points). In contrast, the marginal rate for one-earner married couples with two children was more than 5 percentage points higher than it was for single persons with no children in Canada (5.7 percentage points), the Netherlands (6.2 percentage points), Iceland (9.6 percentage points) and New Zealand (27.0 percentage points). Similar to the marginal tax wedges, these higher 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 2022, 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 2022 were found in New Zealand (0.43), Belgium (0.56), Italy (0.57), Austria (0.58) and Ireland (0.59). In contrast, France (0.97) and Mexico (0.91) either implemented or were close to a proportional system of income tax plus employee SSCs for this household type. For Colombia (0.95), Chile and Costa Rica (both 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 2022.4 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. This elasticity was below 0.50 for single parents earning 67% of the average wage level in New Zealand (0.48), the Netherlands (0.46), Luxembourg and Belgium (both 0.45), Australia (0.42), France and the United Kingdom (both 0.32), Ireland (0.29) and Canada (0.25) and for one-earner married couples at the average wage level with two children in New Zealand (0.43). 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, Hungary and Mexico, and one household type in Estonia and Lithuania for the single worker earning 167% of the AW (1.0). Using this elasticity measure, the income tax system was regressive for a single individual at 167% of the AW in Germany (1.06) and Austria (1.1).
Table 3.10 and Table 3.11 set out gross wage earnings and net income for the eight household types in 2022, after all amounts have been converted into U.S. dollars with the same purchasing power. Single workers with the average wage took home over USD 50 000 in eleven countries: Switzerland (USD 77082), Luxembourg (USD 56 104), the Netherlands (USD 55 373), Iceland (USD 53 060), Norway (USD 51 384), Korea (USD 50 569), Ireland (USD 50 473) and Australia (USD 50 403)) (Table 3.10 column 4). The lowest levels (less than USD 20 000) were in Mexico (USD 13 489) and Colombia (USD 14 644). In the case of a one-earner married couple with two children at the average wage level, families took home over USD 60 000 in Austria, Germany, Iceland, Ireland, Luxembourg, Netherlands and Switzerland; with the lowest level again being in Colombia and Mexico (Table 3.11). With the exception of Chile, Costa Rica and Mexico, the one-earner married couple in OECD countries took home more than 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 2022. 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 the Netherlands (USD 85 828), Luxembourg (USD 94 100) and Switzerland (USD 100 655), and lowest (less than USD 30 000) in Colombia (USD 14 644) and Mexico (USD 13 489). Annual labour costs are equal to annual gross wage in Chile, Colombia, Denmark 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, Colombia and Denmark 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 2022 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 2022 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 2022 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 2022 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 2022 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 2022 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 2022 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.