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.