Table 3.11 and Figure 3.1 show the average tax wedge (combined burden of income tax, employee and employer social security contributions) taking into account the amount of cash benefits each specific household type is entitled to, in 2020. Total taxes due minus transfers received are expressed as a percentage of labour costs, defined as gross wage plus employers’ social security contributions (including payroll taxes). In the case of a single person on average wage the tax wedge ranged from zero (Colombia) and 7.0% (Chile) to 49.0% (Germany) and 51.5% (Belgium). For a one-earner married couple, with two children, at the same wage level, the tax wedge was lowest in Colombia (-5.4%) and New Zealand (5.0%) and highest in Turkey (38.2%) and France (37.9%). As stated in Chapter 1, the tax wedge tends to be lower for a married couple, with two-children, at this wage level than for a single individual without children due to both receipt of cash benefits and/or more advantageous tax treatment. It is also interesting to note that the tax wedge for a single parent, with two children, earning 67% of the average wage was negative in New Zealand (-18.1%), Canada (-17.9%), Colombia (-8.0%) and Poland (-3.5%). Negative tax wedges are due to the cash benefits received by families, plus any applicable non-wastable tax credits, exceeding the sum of the total tax and social security contributions that are due.
Table 3.2 and Figure 3.2 present the combined burden of the personal income tax and employee social security contributions, expressed as a percentage of gross wage earnings (the corresponding measures for income tax and employee contributions separately are shown in Tables 3.4 and 3.5), in 2020. For single workers at the average wage level without children, the highest average tax plus contributions burdens were seen in Belgium (38.4%) and Germany (38.9%). The lowest average rates were in Colombia (0.0%), Chile (7.0%), Mexico (10.8%), Korea (15.0%), Estonia (15.6%), Switzerland (17.1%), Israel (18.0%) and New Zealand (19.1%).
Table 3.3 shows the combined burden of income tax and employee social security contributions, reduced by the entitlement to cash benefits, for each household type in 2020. Figure 3.3 illustrates this burden for single individuals without children and one-earner married couples with two children, with both household types on average earnings. Comparing Table 3.2 and Table 3.3, the average tax rates for families with children (columns 4 -7) are lower in Table 3.3 because most OECD countries support families with children through cash benefits.
Comparing Table 3.2 and Table 3.3, for single parents, with two children, earning 67% of the average wage, 33 countries provided cash benefits in 2020. In Canada, Poland and New Zealand these represented respectively 40.8%, 37.0% and 33.3% of income and they were also at least 25% of income in Lithuania (25.5%), France (26.6%) and Denmark (26.8 %). Thirty-two countries provided cash benefits for a one-earner married couple, with two children, earning the average wage level, although these were less generous relative to income, ranging up to 20.7% (Poland). The lower level of cash benefits for the married couple can be attributed to three reasons: single parents may be eligible for more generous treatment; the benefits themselves may be fixed in absolute amount; or the benefits may be subject to income testing.
Table 3.4 shows personal income tax due as a percentage of gross wage earnings in 2020. For single persons, without children, at the average wage (column 2) – the income tax burden varies between 0.0% (Colombia) and 35.3% (Denmark). In most OECD member countries, at the average wage level, the income tax burden for one-earner married couples with two children is lower than that faced by single persons (compare columns 2 and 5). These differences are clearly illustrated in Figure 3.4. In twelve OECD countries, the income tax burden faced by a one-earner married couple with two children is less than half that faced by a single individual (Austria, Belgium, Hungary, Ireland, Latvia, Luxembourg, Poland, Portugal, the Slovak Republic, Slovenia, Switzerland and the United States). In contrast, there was no difference in eight countries – Australia, Finland, Israel, Lithuania, Mexico, New Zealand, Norway and Sweden. In Chile, the one-earner married couple at the average wage level with children did not pay personal income tax, while the average single worker paid 0.03% of gross wage earnings. In Colombia, neither the single worker on the average wage nor the one-earner married couple at the average wage level paid personal income taxes.
There were only two OECD countries where a married average worker with two children had a negative personal income tax burden. This was due to the presence of non-wastable tax credits, whereby credits were paid in excess of the taxes otherwise due. This resulted in tax burdens of -0.3% in Germany and - 4.5% in the Czech Republic. Similarly, single parents, with two children, earning 67% of the average wage showed a negative tax burden in eight countries – Austria, the Czech Republic, Germany, Israel, Poland, Spain, the United Kingdom and the United States. In three other countries – Chile, Colombia and Latvia – this household type paid no income tax.
A comparison of columns 5 and 6 in Table 3.4 demonstrates that if the second spouse has a job which pays 67% of the average wage, the income tax burden of the household (now expressed as 167% of the average wage) is slightly higher in 22 countries, the largest differences being in the Czech Republic (9.9 percentage points) and Germany (10.3 percentage points). At the same time, the income tax burden is lower in thirteen countries, the largest differences being in the Netherlands (-4.8 percentage points) and Israel (-4.1 percentage points). There is no impact on the tax burden in Chile and Colombia.
An important consideration in the design of an income tax is the level of progressivity - the rate at which the income tax burden increases with income. A comparison of columns 1 to 3 in Table 3.4 provides an insight into the levels of progressivity in the income tax systems of OECD countries. Comparing the income tax burden of single individuals at the average wage level with their counterparts at 167% of the average wage (columns 2 and 3), the lower paid worker faced a lower tax burden in all countries except in Colombia and Hungary in 2020. In Colombia, neither the average single worker nor the counterpart at 167% of the average wage paid income tax. In Hungary, a flat tax rate is applied on labour income and all households without children paid the same percentage of income tax. Comparing single individuals at 67% of the average wage level with their counterparts at the average wage level (columns 1 and 2), the lower paid worker also faced a lower tax burden across all OECD countries, except Colombia and Hungary for the reasons previously mentioned. Finally, the burden faced by single individuals at 67% of the average wage level represented less than 25% of the burden faced by their counterparts at 167% in four OECD countries: Chile (0.0%), the Netherlands (21.0%), Korea (22.3%) and Greece (22.7%).
The addition of social security contributions to the average tax rate reduces this progressivity as well as the proportional tax savings (i.e. tax savings of the low income workers relative to the higher income workers). When comparing Table 3.2 with Table 3.4, the OECD personal average tax burden including social security contributions for single individuals at 67% of the average wage level was only 32.0% lower than their counterparts at 167% compared to the OECD average tax savings of 48.2% for personal income taxes alone in 2020. The OECD average tax savings observed for one-earner married couples with two children at the average wage level relative to the average single workers fell from 35.0% for the personal income tax to 21.4% for the personal average tax burden including social security contributions. These lower figures reflect that there is little variation between social security contribution rates across household types, as shown in Table 3.5.
Table 3.5 shows employee social security contributions as a percentage of gross wage earnings in 2020. For a single worker without children at the average wage (column 2) the contribution rate varies between zero (Australia, Colombia, Denmark and New Zealand) and 22.1% (Slovenia). Australia, Denmark and New Zealand did not levy any employee social security contributions paid to general government. In Colombia, most of the social security contributions are paid to funds outside the general government and are considered to be non-tax compulsory payments. Therefore, they are not counted as social security contributions in the Taxing Wages calculations. There were three other countries with very low rates - Iceland (0.3%), Mexico (1.4%) and Estonia (1.6%). Social security contributions are usually levied at a flat rate on all earnings, i.e. without any exempt threshold. In a number of OECD member countries a ceiling applies. However, this ceiling usually applies to wage levels higher than 167% of the average wage. The flat rates result in a constant average burden of employee social security contributions for most countries between 67% and 167% of average wage earnings. Constant proportional burden for employee social security contributions for over the eight model household types, is observed in (in decreasing order of rates) Slovenia (22.1%), Lithuania (19.5%), Hungary (18,5%), Poland (17.8%), Greece (15.5%), Turkey (15.0%), the Slovak Republic (13.4%), the Czech Republic, Latvia and Portugal (all 11.0%), Norway (8.2%), the United States (7.7%), Chile (7.0%), Spain and Switzerland (both 6.4%), Ireland (4.0%) and Estonia (1.6%).
In addition, at the average wage level only Germany and the Netherlands imposed different burdens of social security contributions on employees according to their family status (see Figure 3.5).
