Tax burden on labor income continues to rise

Personal income tax has risen in 25 of 34 OECD countries over the past three years, as countries reduce the value of tax-free allowances and tax credits and subject higher proportions of earnings to tax, according to new data in the annual “Taxing Wages” publication. 

The increases in tax burdens on labor income in 2013 were largest in Portugal due to higher statutory rates, the Slovak Republic as a result of higher employer social security contributions and the United States due to expiry of previous reductions in employee social security contributions. 

The average tax burden on employment incomes across the OECD increased by 0.2 percentage points in 2013 to 35.9 percent, the report said. It increased in 21 of 34 countries, fell in 12, and remained unchanged in one. 

The 2013 rise follows a substantial increase in 2011 and a smaller one in 2012. Since 2010, the tax burden has increased in 21 OECD countries and fallen in nine, partially reversing the reductions seen between 2007 and 2010. 

“Taxing Wages 2014,” released by the OECD, provides cross-country comparative data on income tax paid by employees, as well as the associated social security contributions made by employees and employers. Both are key factors when individuals consider their employment options and businesses make hiring decisions. 

The report shows how the systems of tax, social security contributions and benefits in OECD countries have become more progressive since the financial crisis in 2007, most notably for poorer households with children.  

This is principally attributed to growth in targeted tax credits or “make-work-pay” provisions for low-income workers, as well as increased child benefits for low-income households. Progressive taxes, designed to achieve a more equal distribution of income after tax, have changed since 2000.  

However, there has been little change in progressiveness of taxation for single workers without children or those at higher income levels, although wide differences exist between countries. 

Ireland, Sweden and Slovenia report the greatest rise in progressive taxation for single taxpayers without children, while the largest decreases in progressivity for single taxpayers without children were seen in Germany, Hungary and Israel.  

The highest average tax burdens for childless single workers earning the average wage in their country were observed in Belgium (55.8 percent), Germany (49.3 percent), Austria (49.1 percent) and Hungary (49.0 percent). The lowest were in Chile (7 percent), New Zealand (16.9 percent) and Mexico (19.2 percent).  

The average tax burden for those earning the average wage has increased by a 0.8 percentage points between 2010 and 2013 to reach 35.9 per cent following a decline from 36.1 to 35.1 per cent between 2007 and 2010.