11/05/2011 - The average tax and social security burdens on employment incomes rose in most countries in 2010, reversing a trend toward declining tax burdens seen in previous years, according to a new OECD report. In most cases, though, any rise reported was small.
The OECD’s annual Taxing Wages shows that tax burdens rose in 22 of the 34 OECD countries. The Netherlands, Spain and Iceland were among the countries experiencing significant increases, while Denmark, Greece, Germany and Hungary were among those showing the biggest drops.
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Taxes on wages, including both employer and employee social security charges, are a key factor in companies’ hiring decisions and individuals’ incentives to work. As part of efforts to restore public finances and put the economy on a higher growth path, governments should consider shifting the tax mix away from direct to indirect taxes (e.g. by increasing recurrent taxes on immovable property) and broadening the VAT and personal income tax base by eliminating tax expenditures, rather than increasing personal income tax rates and social security charges.
Taxing Wages provides detailed analysis on the taxation of employment income across OECD countries and the distribution of this tax burden across different household types and levels of earnings.
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The report calculates the difference between the total cost to an employer of employing someone and that person’s net take-home pay, including child benefits and other family benefits that are generally available to households. The “tax wedge” is derived as the total taxes paid by employees and employers net of cash transfers received divided by the employer’s total payroll costs.
In 2010, Taxing Wages indicates that:
Australia, Chile, Iceland, Israel, Italy, Mexico, the Netherlands, Norway, Poland, the Slovak Republic and Switzerland put large additional burdens on employment costs through compulsory payments which are not regarded as tax, since they are not paid to government, but to privately-managed pension funds or insurance companies. Often, these are paid by the employer, but in Chile, Iceland, Israel, the Netherlands, Poland and Switzerland a large proportion is paid by employees. More information on these “non-tax compulsory payments” is included in the OECD Tax Database (www.oecd.org/ctp/taxdatabase).
This year’s Taxing Wages includes new analysis of tax burden changes comparing 2000 with 2009. On average across the OECD, tax burdens fell across all income levels, particularly due to personal income tax cuts; some countries have also decreased employer social security contributions. On average, tax cuts implemented over this period favour households with children most, and lower earners more than higher earners.
These trends were most marked in Australia, Ireland, New Zealand and Sweden. The biggest exceptions were Greece, Iceland, Japan, Korea and Mexico. The OECD finds that governments that had room for tax cuts over the past decade have generally sought to ensure that working families benefit, particularly those on lower pay and/ or with children. Notwithstanding the recession, there is no sign of this trend being reversed in 2010.
Further information on Taxing Wages, including key results, is available at www.oecd.org/ctp/taxingwages. This webpage includes a new “Information by Country” section which discusses the main trends for each OECD member country separately. These 34 country-specific webpages also include Special Feature graphs that provide information on the changes in tax burdens between 2000 and 2009.