Workers in OECD countries paid just over a quarter (25.5%) of their gross wages in tax on average in 2017, with just over half of countries seeing small increases in the personal average tax rate, according to OECD research
Its Taxing Wages 2018 report shows that the net personal average tax rate – income tax and social security contributions paid by employees, minus any family benefits received, as a share of gross wages – was 25.5% across the OECD.
While this OECD-wide average rate, calculated for a single person with no children earning an average wage, has remained stable in recent years, there is considerable variation in the averages, ranging from below 15% in Chile, Korea and Mexico to over 35% in Belgium, Denmark and Germany.
The UK net personal average tax rate is calculated at 18.1% for a one earner couple with two children and 23.4% for a single person.
Increases in the average personal tax rate in 20 of the OECD’s 35 member countries in 2017 were mainly due to wage increases that reduced the impact of tax-free allowances and credits. Average tax rates fell in 13 countries and were unchanged in two (Chile and Hungary). The biggest increases in the tax rate were in the Czech Republic (0.5 percentage points), Turkey (0.5 percentage points) and Mexico (0.4 percentage points).
The largest decreases were in Luxembourg (-2.0 percentage points), Finland (-0.6 percentage points) and Iceland (-0.5 percentage points).
The research shows almost all OECD countries provide a reduced personal average tax rate for households with children relative to households at the same income level without children. This is due primarily to the provision of cash transfers to parents. Overall, the size of the fiscal benefit for families with children has increased since 2000, and this is especially the case for single workers with children, whose tax rates are often negative.
On average, a one-earner married couple on an average wage with two children pays 14% of gross wages in taxes, due to reduced personal income taxes and cash benefits. The gap is even wider for lower income households. For example, looking at single workers earning 67% of the average wage, a worker without children pays 21.3% of their wages in taxes, whereas a worker with children pays only 1.8%, on average.
Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, said: ‘This easing of the income tax burden on families with children, especially on single parents, is encouraging. Setting tax policy in a way that maintains work incentives, particularly for low and middle-income earners, is vital to spur inclusive growth.’
If taxes and costs paid by employers are also considered, Taxing Wages 2018 finds that overall taxes on labour costs decreased on the average worker for the fourth consecutive year in 2017, due to lower employer social security contributions.
This so-called ‘tax wedge’ – total taxes on labour costs paid by employees and employers, minus family benefits, as a percentage of the labour cost to the employer – fell by 0.13 percentage points to stand at 35.9% of labour costs for the OECD area. The decline, largely due to big reductions in Finland, Hungary and Luxembourg, continues a decreasing trend since 2012 that partially reverses the increases that had been observed in the years immediately after the global economic crisis.
Taxing Wages 2018 is here.
Report by Pat Sweet