This annual publication provides details of taxes paid on wages in OECD countries. This year’s edition focuses on the impact of recent inflation on labour taxation in the OECD and how countries adjust their tax systems in response. For the year 2022, the report also examines personal income taxes and social security contributions paid by employees, social security contributions and payroll taxes paid by employers, and cash benefits received by workers. It illustrates how these taxes and benefits are calculated in each member country and examines how they impact household incomes. The results also enable quantitative cross-country comparisons of labour cost levels and the overall tax and benefit position of single persons and families on different levels of earnings. The publication shows average and marginal effective tax rates on labour costs for eight different household types, which vary by income level and household composition (single persons, single parents, one or two earner couples with or without children). The average tax rates measure the part of gross wage earnings or labour costs taken in tax and social security contributions, both before and after cash benefits, and the marginal tax rates the part of a small increase of gross earnings or labour costs that is paid in these levies.
Taxing Wages 2023
Abstract
Executive Summary
Effective tax rates on labour income increased across the OECD in 2022 at the same time as high inflation caused real wages to decline. The tax wedge1 for all eight household types covered in this Report increased in a majority of OECD countries between 2021 and 2022, with the largest increases seen for households with children, particularly at lower income levels. The results underline the importance of policies to mitigate fiscal drag, the phenomenon by which tax burdens increase due to incomplete adaptation of tax system parameters to inflation.
For the single worker earning the average wage, the OECD average tax wedge in 2022 was unchanged from the previous year at 34.6%. The tax wedge increased in 23 of the 38 OECD countries between 2021 and 2022, decreased in 11 and stayed the same in four. The only country where the increase exceeded one percentage point was the United States (2.20 percentage points), an increase caused by the ending of COVID-19 benefits. In almost all countries where the tax wedge increased for the single worker, the rise was driven by higher personal income tax. In some countries, this was a result of higher average wages interacting with progressive income tax systems; in others, it was driven by a higher proportion of earnings becoming subject to tax as the value of tax allowances and tax credits fell relative to the average wage.
The decrease in the tax wedge for the single worker earning the average wage was greater than one percentage point in Poland (-1.23 percentage points), Hungary (-2.01 percentage points) and Türkiye (-2.66 percentage points). In Poland, the tax wedge decreased because of the introduction of a non-refundable tax credit without upper limit while the decline in Hungary was caused by the lowering of the social contribution tax by 2.5 p.p. and the elimination of the training levy in 2022. In Türkiye, the decline followed the introduction of the Minimum Wage tax exemption.
The OECD average tax wedge for the two-earner couple with two children (one earning 100% of the average wage, the other earning 67% thereof) increased by 0.45 percentage points between 2021 and 2022 to 29.4%. For this household type, the tax wedge increased in 24 countries, decreased in 13 and remained the same in one. The OECD average tax wedge for the couple with one earner and two children increased by 1.05 percentage points between 2021 and 2022 to 25.6%. The difference between the tax wedge for this household type and that of the single worker earning the average wage narrowed by 1.05 p.p. between 2021 and 2022.
The largest increase in the average tax wedge between 2021 and 2022 was observed for the single parent of two children earning 67% of the average wage. The tax wedge for this household type rose by 1.61 percentage points to 16.6% in 2022, increasing in 31 countries, declining in six and staying the same in one. The largest increase in the tax wedge for this household type – of 30.4 percentage points – occurred in Chile and was due to the elimination of a family benefit introduced in response to COVID-19.
This Report covers the third year in which OECD countries were affected by the COVID-19 pandemic. Although labour taxation was an important part of OECD countries’ policy response to the economic shock caused by the pandemic in 2020, most COVID-19 measures were withdrawn by the end of 2021. In 2022, the average OECD tax wedge was lower for seven household types than it had been in 2019, before the pandemic began; only in the case of the single parent earning 67% of the average wage was the opposite the case. However, for four of the eight household types, the tax wedge was higher in 2022 than it had been in 2019 in a majority of countries; for three household types, the tax wedge was lower in 2022 than in 2019 in a majority of countries, and for one household type the tax wedge rose in 18 countries and declined in 18 countries between 2019 and 2022.
The Report contains a Special Feature on the indexation of labour taxation and benefits in OECD countries. Based on the results of a questionnaire circulated to WP2 in 2022, this chapter shows that indexation practices vary between and within OECD countries. Just under half of OECD countries automatically index their personal income tax systems to inflation (usually consumer price inflation), while 55% of countries automatically adjust their social security contributions and half do so for cash benefits. The chapter shows that increases in nominal wages between 2019 and 2022 placed upwards pressure on the tax wedge in OECD countries, particularly for a single parent earning below the average wage.
Key findings
The average tax wedge for single workers increased in a majority of countries in 2022
The tax wedge of single workers with no children earning the average national wage was 34.6% of labour costs in 2022.
Between 2021 and 2022, the tax wedge for this household type increased in 23 countries and fell in 11.
In 2022, the largest tax wedges for this household type were observed in Belgium (53.0%), Germany (47.8%), France (47.0%), Austria (46.8%) and Italy (45.9%).
The personal average tax rate for this household type was 24.7% of gross wage earnings in 2022. Belgium had the highest rate, at 40.3%; Denmark, Germany and Lithuania were the only other countries with rates above 35%.
The average tax wedge for households with children rose across the OECD in 2022
The OECD average tax wedge for the two-earner couple (one earning 100% of the average wage, the other earning 67% thereof) with two children was 29.4% in 2022, larger than the tax wedge for couples with one earner at the average wage (25.6%) and that of the single parent earning 67% of the average wage (16.6%).
The largest increase across all eight household types between 2021 and 2022 was observed in the tax wedge for the single parent earning 67% of the average wage. Increases of more than one percentage point for this household type were observed in twelve countries.
The tax wedge for married couples with one earner and two children was lower than for the single worker in almost all OECD countries. The difference was greater than 15% of labour costs in Austria, Belgium, the Czech Republic, Luxembourg and Poland.
Average wages and post-tax real incomes fell in real terms across the OECD
The average wage increased in all OECD countries in nominal terms between 2021 and 2022 but declined in real terms in 35 out of 38 countries.
Declines in real wages larger than 5.0% occurred in nine countries: the Czech Republic (-7.0%), Estonia (-10.0%), Greece (-7.4%), Latvia (-6.2%), Lithuania (-6.3%), Mexico (-6.8%), the Netherlands (-8.3%), Spain (-5.3%) and Türkiye (-8.8%).
The real post-tax income for a single worker earning the average wage decreased in 34 countries between 2021 and 2022.
Indexation of labour taxation and benefits in OECD countries (Special Feature)
Inflation rates in 2022 reached their highest level since 1988, reviving interest in indexation policies in OECD countries, since these are an important means of offsetting fiscal drag, the phenomenon by which higher nominal wages automatically cause tax burdens to rise.
Based on a questionnaire circulated to OECD countries, this Special Feature shows that indexation practices vary between and within OECD countries.
Seventeen OECD countries automatically adjust their PIT systems in line with inflation, while 21 do so on a discretionary basis. Social security contributions and benefits are automatically adjusted in 21 countries and 19 countries, respectively.
In most countries where automatic indexation occurs, price inflation is used as the benchmark.
The upwards pressure on tax burdens resulting from higher nominal wages between 2019 and 2022 was especially pronounced for low-income households with children.
Note
← 1. 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 and social security contributions paid by employees and employers, minus cash benefits received, as a proportion of the total labour costs for employers.
