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Taxing Wages 2018
Taxing Wages
Chapter 2. Special feature: Differences in the disposable incomes of households with and without children
Introduction
The tax system materially impacts the disposable income of taxpayers and of households through the combined impact of personal income taxes, employee social security contributions (SSCs), and cash transfers. In addition to raising revenues, taxes are also a key tool available to governments to influence social outcomes, including the distribution of income between households, and the alleviation of poverty. For governments, reducing child poverty and supporting households with children are often among the critical social goals of the tax system.
This Special Feature uses the Taxing Wages models to consider the impact of tax measures on the disposable income of households with children. It includes the combined impact of personal income tax reductions, reductions in employee SSCs, and cash transfers provided to taxpayers with children relative to the treatment applicable to taxpayers in the same circumstances without children. Data is presented for 2016, the most recent year available, and is compared with 2000 to understand how the impact of the tax system on households with children has changed over this period.
This special feature is structured as follows. Section 2.2 outlines the definitions and methodology used in the analysis. Section 2.3 considers the impact of the tax system on the disposable incomes of households with and without children, highlighting differences in the net personal average tax rates (NPATRs) in 2016. Section 2.4 extends the analysis to considers changes in the taxation of households with children between 2000 and 2016, both for the OECD average and for individual countries. Section 2.5 concludes.
Definitions and methodology
To assess the impact of the tax system on households with children, this special feature compares the impact of OECD tax systems on two types of taxpayer, both with and without children, resulting in four household types being considered (Table 2.1).
Table 2.1. Household types discussed in the Special feature
Three of these four household types are included among the eight standard household types considered in the rest of the publication (the exception being the married couple at 167% of the average wage without children). For simplicity, the married couple at 100% and 67% of the average wage are referred to in this chapter as “the married couple” and the single worker at 67% of the average wage is referred to as “the single worker”.
The assumptions about the number and age of the children in the household are the same as those used in the rest of the publication: namely that the children are between 6 and 11 years of age and that the most beneficial tax and cash transfer treatment applies. The cash transfers that are included are those that are generally available to all workers. The taxpayers earning 67% of the average wage are assumed to work fulltime. Please see Annex for further information on the Taxing Wages methodology.
To estimate the impact of the tax system on the disposable income of households, the special feature shows the NPATR for each household type, and by extension, the post-tax disposable wage, as a percentage of average wage. The NPATR is calculated as the income tax payable plus employee SSCs payable less cash transfers received, as a percentage of the gross wage earnings of the taxpayer. The disposable income of the taxpayer is therefore their gross wage earnings after the combined impact of income tax, employee SSCs and cash transfers (i.e. disposable income = gross wage earnings * (1-NPATR)).
The analysis in this special feature focuses on the impact of the tax system on the disposable income of the household, and consequently, limits consideration to the applicable NPATR. Other indicators presented in Taxing Wages are not considered, as they are not directly relevant to the disposable income of the household types. These indicators include the tax wedge, which measures the share of total labour costs paid in taxes (rather than the share of gross earnings), and the net personal marginal tax rate, which measures the share of the next dollar of income that is paid in taxation.1 Including these two indicators would considerably broaden the scope of the special feature and would require a more thorough analysis of the impact of the tax system on the hiring decisions of employers as well as the labour incentives faced by households (including second earners), as well as the impact of many other policy factors on these decisions including unemployment benefits, parental leave, and childcare allowances and deductions.
Differences in disposable incomes of households with and without children, 2016
This section considers differences in the disposable income of households with and without children in 2016 by showing the NPATRs that apply to taxpayers in the same circumstances both with and without children. It disaggregates the differences in NPATRs to understand whether these are generated from differences in personal income taxation, employee SSCs or cash transfers, and shows the post-tax wage of the different household types as a percentage of average wage.
NPATRs for households with and without children
Net personal average tax rates include the combined impact of personal income taxation, employee SSCs, and cash transfers provided to households, measured as a proportion of gross wages. Using the Taxing Wages models, the NPATRs applying to the married couple (at 100% and 67% of average wage) and the single worker (at 67% of average wage), both with and without children, are shown in Figure 2.1.
Figure 2.1. Net average personal tax rates for households with and without children
The OECD average NPATR for the married couple with children is lower than that for the married couple without children. On an unweighted average basis, the married couple at 100% and 67% of average wage with children pays a net personal average tax rate of 19.3% compared to 23.8% for the married couple at the same income level without children. The lower NPATR for the couple with children is also observed within almost all OECD countries: 31 of the 35 OECD countries provide lower tax rates for the married couple with children than for the married couple without children, with the exceptions being Australia, Iceland, Mexico and New Zealand. Across OECD countries, the reductions in NPATRs for the married couple with and without children range from 0.3 p.p. in Chile to 11.1 p.p. in Hungary, with an average difference of 4.4 p.p. and a standard deviation of 3.0%. Sixteen OECD countries provide between two and six percentage points of reduction.
The difference between the NPATR for the single worker without children and the single worker with children is more pronounced, both on an OECD average and a country-by-country basis. On an unweighted average basis, the single worker with children has a NPATR of 1.4% of their gross wage compared to 21.2% for the single worker without children. The lower NPATR for the single worker with children is also observed in all but one OECD country: 34 out of the 35 countries provide lower tax rates for the single worker with children, with the sole exception being Mexico which has the same NPATR for both family types. In 13 countries, NPATRs for the single worker with children were negative. No negative NPATRs are observed for the single worker without children, or for the married couple with or without children. Across OECD countries, the reductions in NPATRs for the single worker with and without children range from 0.8 p.p. in Chile to 59.6 p.p. in Poland, with an average difference of 19.7 p.p. and a standard deviation of 12.7%. Twenty-one countries have NPATRs for the single worker with children that are 15 and 30 p.p. lower than the NPATR for the single worker without children.
Disaggregation of differences in NPATRs
Most OECD countries have lower NPATRs for taxpayers with children than for taxpayers in the same circumstances without children. The lower NPATRs for families with children may be due to reductions in personal income taxes or employee SSCs, or to increased cash transfers for households with children. Under each of these elements, a variety of means can be used to reduce NPATRs:
Personal income tax: increased allowances or tax credits for households with children; households may be able to split their taxable income across their family members, resulting in lower marginal rates applying; or different tax rate schedules available for households with children compared to those without;
Social security contributions: although rarer, countries may offer tax credits for children that reduce employee SSCs, alternately, rates may differ for families with children, or different allowances and credits may apply
Cash transfers: higher levels of cash benefits for households with children than for those without, or increase support as the number of children increases; eligibility thresholds and abatement rates or thresholds may also vary between households with and without children.
Figure 2.2 provides an overview of the difference in NPATRs for the married couple and the single worker with and without children, disaggregated into changes in personal income tax, employee SSCs, and cash transfers. It shows on the left the difference for the married couple, and on the right the difference for the single worker.
Figure 2.2. Decomposition of differences in net personal average tax rates, 2016
For the married couple, the OECD average NPATR in 2016 is 4.4 p.p. lower for the couple with children than for those without (with NPATRs of 19.3% and 23.8%, respectively). The difference is primarily due to lower personal taxes (1.7 p.p.) and higher cash transfers (2.6 p.p.).
Within countries, the reductions in NPATRs are due to higher cash transfers as well as reductions in personal income taxation for households with children: 17 countries provide higher cash transfers and lower personal income taxes for the couple with children than those without, and a further 9 provide support through cash transfers alone. Five countries provide support through lower personal income taxes alone (Korea, Portugal, Spain, Turkey and the United States), and only one country, the Netherlands, provides any significant measure of support through employee SSCs, in conjunction with lower personal income taxes and cash transfers. In three OECD countries (Australia, Iceland and Mexico) the NPATR is the same for the married couple whether or not they have children, and in New Zealand NPATRs are marginally higher for the married couple with children than for the married couple without, due to the Independent Earner Tax Credit (available to workers who do not receive other forms of tax credits or benefits) which is slightly higher at this income level than available family benefits.
For the single worker with children, NPATRs are 19.8 p.p. lower than for the single worker without children (at 1.4% and 21.2% of gross wage income, respectively). On average, the reduction in NPATRs for this household type is principally due to higher cash transfers, which explain 13.6 p.p. of the difference, while reductions in personal income taxes account for 6.0 p.p.. Reductions in employee SSCs play a significant role only in the Netherlands and are consequently very low in the OECD average.
Across OECD countries, the most common mechanism by which NPATRs are lowered for the single worker with children is through a combination of personal income tax reductions and higher cash transfers, applied in 24 countries. Six countries provide support through cash transfers alone, and in a further three, personal income tax payable is lower for the single worker with children than without. In three countries, employee SSCs are also lower for the single worker with children: in the Netherlands a tax credit lowers personal incomes taxes and employee SSCs for households with children, in addition to higher cash transfers for families with children; in Finland, any residual tax credit after the reduction of central income tax proportionally reduces local taxes and employee SSCs, and cash transfers also apply; and in Germany, the long-term care contribution rate is higher for childless workers (1.425% compared to 1.175% for workers with children).
Impact on disposable incomes on households
The disposable income of households is their gross earnings less the combined impact of personal income taxes, employee SSCs and cash transfers. Figure 2.3 presents the gross earnings and disposable income of the married couple and the single worker, with and without children, as a percentage of average wage.
Figure 2.3. Pre and post-tax disposable incomes as % of AW, 2016
On average across the OECD, the disposable income of the married couple without children was 127% of average wage, and the married couple with children had a disposable income of 135% of average wage, compared to their combined gross wage earnings of 167% of average wage. Among countries, the lowest disposable incomes for the married couple with children were seen in Belgium, at 114% of average wage; and the highest are found in Chile, at 156% of average wage. In both countries, however, the disposable incomes of the married couple with children did not differ materially from those without children (104% and 155% of average wage, respectively for Belgium and Chile).
For the single worker without children, the average disposable income across OECD countries was 53% of average wage, compared to 66% of average wage for the single worker with children; compared in both cases to gross wage earnings of 67% of average wage. The lowest disposable incomes for the single worker with children are seen in Turkey, at 52% of average wage, with the highest seen in Poland at 91% of average wage. In thirteen countries, the disposable incomes of the single worker with children were higher than pre-tax wages due to negative NPATRs for this household type. The range of disposable incomes of the single worker without children between countries was less, from 44% of average wage in Germany to 65% in Mexico.
Changes in NPATRs of households between 2000 and 2016
This section provides an overview of changes in NPATRs between 2000 and 2016 for the married couple and the single worker, both with and without children. It focuses first on changes in the OECD average, before considering changes within countries in more detail.
Changes in the OECD average NPATRs
Since 2000, the NPATRs applying to the four household types have been affected by a variety of policy changes.2 Between 2000 and 2016, the OECD average NPATR has fallen all four household types, as shown in Table 2.2. The fall was most pronounced for the single worker with children (3.5 p.p.) and smaller for the other three household types (ranging from 0.7 p.p. for the married couple with no children, to 1.1 p.p. for the married couple with children).
Table 2.2. Summary of net personal average tax rates, OECD average, 2000 and 2016
Figure 2.4 shows the OECD average NPATRs for the married couple with and without children (on the left) and for the single worker with and without children (on the left). The decrease in the average NPATR for each of the four household types was relatively steady across the 16 year period, with the exception of the period of the financial crisis and in 2016. During the crisis, the OECD average NPATR for all four household types experienced a sharper fall, with low points occurring in 2009 for each household type. Subsequently, the OECD average for each household type increased until 2013, before decreasing again until 2016. The fall in the average NAPTR during the financial crisis and the subsequent increase were most pronounced for the single worker with children. In 2016, a change to the tapering of family benefits and the introduction of an additional family benefit (i.e. the Family 500 Plus Program) in Poland decreased the NAPTR of the single worker with children significantly, resulting in a large drop in the OECD average.
Figure 2.4. Trends in OECD average net personal average tax rates over time
For each of the different household types:
For the married couple (with gross earnings of 100% and 67% of average wage):
NPATRs for the couple without children fell from 24.5% in 2000 to 23.9% in 2007, before dipping to 22.9% in 2009. They then rose to 23.9% in 2013, before decreasing steadily to 23.8% in 2016;
NPATRs rates for the couple with children fell from 20.4% in 2000 to 19.5% in 2007, before dipping to 18.6% in 2009. They then rose to 19.9% in 2013, before decreasing steadily to 19.3% in 2016;
For the single worker (with gross earnings of 67% of the average wage):
NPATRs for the single worker without children fell from 22.2% in 2000 to 21.3% in 2007, before dipping to 20.4% in 2009. It then rose to 21.5 in 2013, before decreasing steadily to 21.2% in 2016;
NPATRs for the single worker with children fell from 5.0% in 2000 to 3.4% in 2007, before dipping to 2.4% in 2009. It then rose to 4.5% in 2013, before decreasing steadily to 1.4% in 2016.
Over the period between 2000 and 2016, the difference in NPATRs between the married couple at 167% of the average wage, with children, and the married couple at the same income level without children, has widened by 0.3p.p. Over the same period, the difference for the single worker at 67% of the average wage, with and without children, has widened more significantly (2.6 p.p.).
Changes in country NPATRs between 2000 and 2016
Between 2000 and 2016, changes in NPATRs for the four household types varied significantly both across and within countries. ge for households with children Figure 2.5 shows the percentage point change for each household type, both with and without children. It shows on the horizontal axis the percentage point change between 2000 and 2016 for households without children, and on the vertical axis, the percentage point change for households with children
Figure 2.5. Percentage point change in net personal average tax rates between 2000 and 2016
For the married couple, whether or not they have children, the changes in NPATRs between 2000 and 2016 are clustered between -8 and 8 percentage points in all countries except Sweden (families without children) and Poland (families with children). In most countries the changes to NPATRs for the married couple were small: 26 countries had changes of less than 5 percentage points for the married couple both with and without children. Countries where larger changes were observed include:
Iceland, where NPATRs on both family types increased by 4.2 and 5.7 p.p. respectively, in part due to the change to a progressive tax system in 2010 and the removal of tax reliefs for compulsory pension contributions in 2002.
Israel, where NPATRs decreased by 6.2 p.p. for the family without children, and 8.0 p.p. for the family with children, due to a general policy to reduce personal income taxation since 2003.
Mexico, where NPATRs increased for both family types by 8.2 p.p., primarily due to tax reforms beginning in 2008 which included the elimination of the fiscal subsidy and reform of the income brackets of the tax schedule.
The Netherlands, with decreases of 8.5 and 6.2 p.p. for families without and with children, respectively; in part due to a thorough reform of the tax system in 2001.
Sweden, where NPATRs on the married couple with and without children fell by more than 8 p.p., primarily due to the introduction and subsequent increases of an earned income tax credit between 2007 and 2010.
In most countries, changes in NPATRs for the married couple were similar whether or not the couple had children. In 32 countries, the direction of change between 2000 and 2016 was the same for both household types. In the three countries where NPATRs diverged over this period, the change in one direction was very small: in Australia, the NPATR decreased for the married couple without children (-2.3 p.p.) and increased very slightly (0.1 p.p. for the married couple with children); in the Czech Republic, the tax rate on the married couple with children decreased by 1.8 p.p. and the rate for the couple without children increased by 0.4 p.p.; and in Italy the tax rate fell for the married couple with children (2.3 p.p.) but increased slightly for the married couple without children (0.3 p.p.).
The situation for the two household types headed by the single worker is more diverse. While the changes to NPATRs between 2000 and 2016 for the single worker without children were also less than 5 p.p. in 30 countries, changes for the single worker with children ranged from -53.5 p.p. in Poland to +14.1 p.p. in Iceland, with sixteen countries showing changes of more than five percentage points. Within countries, the changes in NPATRs for the single worker with and without children did not necessarily go in the same direction or have a similar magnitude: in six countries, tax rates on the single worker with children increased, while on the worker without children they decreased; in five countries, the NPATR decreased for the single worker with children and increased for the worker without children; and in a further 12 countries, the reduction in the NPATR for the single worker with children was more than twice as big as for the single worker without children.
Larger changes for the single worker with children include:
Canada, where the NPATR decreased by 17.1 p.p., with the largest change due to child benefit reforms in 2010, where the single parent tax credit increased significantly (from CAD 147 to 280).
The Czech Republic, where the NPATR increased by 13.2 p.p., due in part to the switch from a progressive to a flat rate tax system in 2008, and the lowering of basic tax credits in 2011.
France, where the NPATR decreased from 13.5% in 2015 to 1.0% in 2016 due to a large increase in family cash transfers from general government in 2016 including the introduction of an in-work benefit, dependent on household situation and income.
Iceland, where NPATRs increased by 14.1. p.p. for the single worker with children (and by 5.1 p.p. for the single worker without children) due to the reforms noted above;
Ireland, where a decrease of 22.7 p.p. in NPATRs was observed for the single worker with children, due in large part to reforms in 2002 which increased the single parent tax credit, child benefits and the household income supplement
Israel, where the reductions in NPATRs for the single worker with and without children were due to a general decrease of the tax schedule since 2003 which primarily affected lower income brackets, as well as the introduction of an earned income non-wastable tax credit for households in 2012 (dependent on household income and number of children), and the increase of the income range for eligible single parents in 2016.
Mexico, where rates increased due to the reforms noted above;
Netherlands, where NPATRs decreased for both family types following reforms in 2015, including the abolishment of the single parent tax credit and higher cash transfers for families with and without children and the introduction of extra cash benefits for single parents. From 2014 to 2015 child benefits increased, and average income tax rate has decreased due to a series of changes to the lower rate.
New Zealand, where NPATRs for the single worker with children have decreased by 11.6 p.p. largely due to the introduction of the Working for Families tax credits in 2004.
Poland, due to the introduction of the Family 500+ programme and a change to the benefit calculation rule in 2016 which meant that for incomes above the threshold the benefit was tapered rather than removed.
The Slovak Republic, where NPATRs increased gradually throughout the period due in part to reforms to cash payments in 2004 which moved from an income tested to a flat rate, as well as to further reforms in 2007 to reduce the basic and spouse allowances as income increases.
Sweden, where rates for both family types fell (by 9.4 p.p. for the single worker without children and by 7.4 p.p. for the worker with children) following increases in tax allowances for all household types and the introduction of several tax credits throughout the years for children and low income earners.
The United Kingdom, where the decrease of 9.0 p.p. in the NPATR for the worker with children was due to the reduction of the lowest tax rates from 22% to 20% in 2008 and an increase in the child tax credit in 2008.
The similar scale of changes for the married couple with and without children imply that in these cases, changes in NPATRs were driven by broader changes in tax policy. For the single worker, where changes varied considerably depending on whether or not the worker had children, the changes were often the result of specific measures – typically tax credits – which reduced the NPATRs of the household with children. This may be partially explained by the lower level of income of this household type. Further analysis is needed to determine the impact of income level, or the single-parent household type, in driving the larger change in NPATRs for this household type.
Figure 2.6 provides a snapshot of changes in the NPATRs of each household type in all OECD countries between 2000 and 2016. The blue line for each country shows the NPATR for the household types without children in 2000 and 2016, and the change between these years, whereas the red line shows the same information for the corresponding household type with children. The dotted grey lines between the red and blue lines show the difference in NPATRs for households with and without children in each year.
Figure 2.6. Net personal average tax rates in 2000 and 2016
Conclusions
This special feature has compared the net personal average tax rates (NPATRs) of two sets of taxpayers with and without children: the married couple at 100% and 67% of average wage; and the single worker at 67% of average wage.
On an OECD average basis, households with children face a lower NPATR than the same household type without children, and the difference is considerably more pronounced for the single worker. This observation is also true in almost all OECD countries: in 2016, 31 countries had lower NPATRs for the married couple with children relative to the same couple without, and 34 had lower NPATRs for the single worker with children than for the single worker without. In 13 countries, NPATRs for the single worker with children were negative. No negative NPATRs are observed for the single worker without children, or for the married couple with or without children.
Differences in the NPATRs are due primarily to higher cash transfers being available for households with children. In many countries, these are combined with reductions in personal income taxation due to joint taxation or higher allowances and credits for families with children. Employee SSCs payable do not typically vary depending on whether the household has children, with the only significant exception being the Netherlands.
Since 2000, NPATRs have decreased for all four household types on average across the OECD. The average for the single worker with children has decreased the most out of all four types, and also had more inter-country variation across this time. Twenty-one OECD countries had lower NPATRs for the single worker with children in 2016, relative to 2000, primarily due to the introduction of cash payments tailored at families with children during this period. In 14 countries, NPATRs were higher for the single worker with children in 2016 than in 2000, with the largest increases being due to more general tax reforms.
Notes
← 1. While not discussed in the special feature, the tax wedge on three of the four household types can be found in Table 3.1, Table 3.6, Table 5.1, Table 5.6, Table 6.1a, Table 6.4a and Table 6.7a and the net marginal tax rate of three household types can be found in Table 3.7 Table 5.7.
← 2. 2000 is used as the starting point as this is the longest period for which the Taxing Wages models are calculated.