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.