Executive Summary
In 2020, the OECD average tax wedge for the single worker earning the average wage was 34.6%, a decrease of 0.39 percentage points from 2019, reflecting the initial impact of the COVID-19 crisis on both wages and labour tax systems. In the period covered by Taxing Wages (2000-2020), the largest decreases in the OECD tax wedge for the average worker without children are observed in 2008 (0.48 percentage points) and in 2009 (0.52 percentage points), in the context of the Global Financial Crisis.
The tax wedge, the primary indicator presented in this Report, measures the difference between the labour costs to the employer and the corresponding net take-home pay of the employee. It is calculated as the sum of the total personal income tax (PIT) and social security contributions (SSCs) paid by employees and employers, minus cash benefits received, as a proportion of the total labour costs for employers.
The OECD average tax wedge decreased for the single worker in 2020, due to falls in 29 out of the 37 OECD countries. The decrease was derived for the most part from lower income taxes, linked in part to lower nominal average wages in 16 countries, and in part to policy changes, including tax and benefit measures introduced in response to the COVID-19 pandemic. In Austria, a marginal tax rate within the income tax schedule was reduced; in Lithuania, the tax-exempt amount was increased; in Canada, the decline in the tax wedge resulted from a one-time special payment through the Goods and Services Tax credit that was delivered on 9 April 2020; in the United States, the decrease in the tax wedge was mainly due to the Economic Impact Payment (EIP) that was part of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).
Seven OECD countries experienced an increase in the tax wedge for the single worker earning the average wage in 2020. The increases in the tax wedge were even smaller than the decreases observed and did not exceed half a percentage point in any country. In all but one country (Korea), they occurred primarily due to wage growth.
The OECD average tax wedge for the one-earner couple with two children also substantially decreased. It declined by 1.15 percentage points to 24.4% in 2020. This is the largest decrease recorded for this household type since Taxing Wages began in 2020, and brings the OECD average tax wedge for this household type to its lowest recorded point. There were decreases of one percentage point or more in 16 OECD countries for the one-earner couple – Austria, Belgium, Canada, Colombia, Finland, Germany, Iceland, Ireland, Italy, Korea, Latvia, Lithuania, Luxembourg, the Netherlands, Poland and the United States. Seven of these countries introduced tax and benefit measures related to the COVID-19 crisis in 2020 that affected this household type. For example, extra or one-off cash benefit or tax provision payments in response to the COVID-19 crisis were made in Austria (1.66 percentage points), Canada (2.10 percentage points), Germany (1.38 percentage points), Iceland (1.27 percentage points), Korea (2.06 percentage points), Lithuania (9.88 percentage points) and the United States (4.62 percentage points).
The report also contains a Special Feature on the impact of COVID-19 on the tax wedge in OECD countries. The Special Feature considers the impact of changes in the labour market due to COVID-19 on the Taxing Wages indicators and disentangles the role of changes in nominal average wages, and of COVID-19 support measures, in the changes in the tax wedge observed in 2020.
The average tax wedge in the OECD decreased in 2020 relative to 2019
Across OECD countries, the average PIT and total employee and employer SSCs on employment incomes was 34.6% in 2020, a decrease of 0.39 percentage points.
In 2020, the highest average tax wedges for single workers with no children earning the average national wage were in Belgium (51.5%), Germany (49.0%), Austria (47.3%), France (46.6%) and Italy (46.0%). The lowest were in Colombia (zero), Chile (7.0%) and New Zealand (19.1%).
Between 2019 and 2020, the tax wedge increased in seven of the 37 OECD countries and fell in 29. The decrease was greater than 1 percentage point in Italy (1.91 percentage points) and the United States (1.37 percentage points). By contrast, there were no increases in the tax wedge of the single worker of more than 0.5 percentage points. The largest increases were in Australia (0.42 percentage points), Korea (0.31 percentage points) and New Zealand (0.34 percentage points).
The average tax wedge for families with children in 2020 was 24.4%
In 2020, the highest tax wedge for one-earner couples with two children at the average wage was in Turkey (38.2%). Greece, Sweden and France had tax wedges of between 37% and 38%. Colombia had the lowest tax wedge (-5.4%), followed by New Zealand (5.0%), Chile (7.0%) and Switzerland (9.6%).
Between 2019 and 2020, the tax wedge for this household type decreased by more than one percentage point for 16 countries. The largest decreases were in Lithuania (9.88 percentage points), the United States (4.62 percentage points), Poland (4.32 percentage points), Italy (2.68 percentage points), Canada (2.10 percentage points) and Korea (2.06 percentage points). The only increase exceeding one percentage point was in New Zealand (1.58 percentage points).
The tax wedge for one-earner couples with children is lower than for single individuals without children in all OECD countries except in Mexico, where both household types face the same tax levels. The differences are around 15% or more of labour costs in Austria, Belgium, Canada, the Czech Republic, Germany, Ireland, Lithuania, Luxembourg, Poland and Slovenia.
The impact of COVID-19 on the tax wedge in OECD countries (Special Feature)
The falls in country tax wedges for the single worker, the one-earner couple with two children, and the single parent resulted predominantly from changes in tax policy settings, although falling average wages also contributed in some countries.
By contrast, increases in the tax wedge were almost all driven by rising average wages, offset slightly by policy change.
In the absence of the wage changes seen in 2020, the OECD average would have decreased by between 0.0 and 0.2 percentage points more for the three household types.
Of the ten countries for which COVID-19 measures were modelled, support has been primarily delivered through the provision of enhanced or one-off cash benefits, with a focus on supporting families with children. Only a few countries have introduced measures to change the structure of their personal income taxes or SSCs in direct response to the COVID-19 pandemic. Consequently, the impact of COVID-19 support measures is primarily in reducing the tax wedge for families with children rather than the single worker.
Taken together, the impact of these COVID-19 measures is smaller than other policy changes; accounting for roughly two-fifths of the decrease in the OECD average between 2019 and 2020 for the single parent and the one-earner couple, and one-fifth for the single worker.