Effective tax rates on labour income edged up across the OECD in 2023 while inflation remained above historic levels. With tax systems in many OECD countries not fully adjusting to inflation, the average tax wedge1 for all eight household types covered in this Report increased in a majority of countries between 2022 and 2023, driven in most cases by higher income taxes. For the second consecutive year, post-tax incomes at the average wage level declined across a majority of OECD countries.
For the single worker earning the average wage, the OECD average tax wedge in 2023 was 34.8%, an increase of 0.13 percentage points (p.p.) with respect to 2022. This was the second consecutive year in which the tax wedge for this household type has risen, following two years of decline during the COVID-19 pandemic in 2020 and 2021. The tax wedge increased in 23 of the 38 OECD countries between 2022 and 2023, decreased in 13 and stayed the same in two. The increase exceeded one percentage point in Australia (2.14 p.p.), due to growth in nominal earnings and the elimination of a tax relief, and Luxembourg (1.39 p.p.), also due to higher nominal earnings. The decreases in the tax wedge for the single worker earning the average wage were all smaller than one percentage point, ranging from -0.01 p.p. in Canada to -0.98 p.p. in Mexico.
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 0.06 p.p. between 2022 and 2023 to 29.5%. For this household type, the tax wedge increased in 21 countries and decreased in 17. The OECD average tax wedge for the couple with one earner and two children increased by 0.08 p.p. between 2022 and 2023 to 25.7%. The difference between the tax wedge for this household type and that of the single worker earning the average wage increased by 0.04 p.p. to 9.1 p.p. between 2022 and 2023.
The only decrease in the average tax wedge between 2022 and 2023 was observed for the single parent of two children earning 67% of the average wage. The tax wedge for this household type decreased by 0.31 p.p. to 16.5% in 2023, increasing in 21 countries and declining in 17. The largest decrease in the tax wedge for this household type – of -13.1 p.p. – occurred in the Slovak Republic and was due to a temporary increase in the child tax credit and an increase in child cash transfers. In 2022, the tax wedge for this household type increased by 1.27 p.p., the largest increase observed for any of the household types that year.
The Report contains a Special Feature on the tax wedge on second earners in OECD countries. This chapter sheds light on how tax policy may affect the incentives facing women when they decide whether and how much to work, in a context of persistent gender-related inequalities in labour outcomes, particularly as concerns the labour force participation of women (who account for over 75% of second earners and two-thirds of part-time workers in most OECD countries). The chapter uses the Taxing Wages models to calculate the effective tax rates on a second earner who takes up employment or increases the amount they work, which it compares with that of a single worker. Except in countries with individual taxation, the average tax wedge of second earners who take up employment is higher than that of single workers at the same wage level, although the second-earner tax wedge has declined in recent years. The marginal tax wedge for a second earner who increases their earnings is similar to that of a single worker.