Effective tax rates on labour rebounded in 2021 as the global economy recovered and many countries began withdrawing or scaling back measures implemented in response to the COVID-19 pandemic, according to a new OECD report.

Taxing Wages 2022 shows that rising household incomes in 2021 coupled with the reversal of many tax and benefit policies linked to the pandemic drove increases in effective taxes on wages across the OECD. This marks a turn-around from 2020, when the pandemic drove significant decreases in the labour tax wedge – defined as the total taxes on labour paid by both employees and employers, minus family benefits, as a percentage of the labour cost to the employer.

The report points to an increase in the tax wedge in a majority of OECD countries during 2021, as many countries withdrew or scaled back measures introduced to support households during the pandemic. In spite of these increases, the average tax wedge across the OECD declined slightly as relatively large declines in the tax wedge were observed in a small number of countries where new COVID-19 support measures were introduced in 2021.

In most countries, increases to the tax wedge in 2021 have more than offset the sharp declines recorded in 2020 for a number of household types, and have seen the tax wedge rebound to higher levels than in 2019 before the pandemic. For a one-earner couple on 100% of the average wage with two children and for a single-parent household earning 67% of the average wage with two children, the tax wedge was larger in 2021 than it was in 2019 in 21 countries.

The average tax wedge for the one-earner couple on 100% of the average wage with two children declined by 1.2 percentage points over the 2019-21 period, while that of the single parent on 67% of the average wage with two children declined by 1 percentage point. Both falls were larger than the decline for the single worker without children, for whom the tax wedge fell by 0.3 percentage points to 34.6%.

Between 2020 and 2021, the tax wedge for the single worker increased in 24 of the 38 OECD countries, fell in 12 and remained the same in two. The increases exceeded one percentage point in Israel, the United States and Finland, while the declines exceeded one percentage point in Australia, Latvia, Greece and the Czech Republic. In almost all countries where the tax wedge increased for this household type, the rise was driven by higher personal income tax, as higher average wages interacted with the progressivity of tax systems.

The tax wedge for one-earner households on the average wage with two children increased in 27 countries, fell in 10 countries and remained unchanged in one between 2020 and 2021. The increase exceeded one percentage point in 10 countries, with the largest increases seen in Lithuania, Austria and Canada. Decreases of over one percentage point were observed in five countries, with the largest fall in Chile (of 25.5 percentage points) due to the Emergency Family Income, a temporary COVID-19 support measure.

The gap between the OECD average tax wedge for the single worker and the one-earner couple with children widened by 0.36 percentage points between 2020 and 2021 to 10.2 percentage points.

Taxing Wages 2022 provides unique cross-country comparative data on income tax paid by employees, cash benefits received by in-work families and the associated social security contributions and payroll taxes made by employees and employers across the OECD, which are key factors when individuals consider their employment options and businesses make hiring decisions.

The report illustrates how these taxes are calculated and examines the impact on household incomes. It enables cross-country comparisons of labour costs and the overall tax and benefit position for eight different household types, varying by income level and household composition (single persons, single parents, one- or two-earner households, with or without children).

This year’s report includes a special chapter on how labour taxation has responded to the economic shocks related to the COVID-19 pandemic. It pays particular attention to what drove the changes in the main indicators, including trends in average wages and changes to tax and benefit systems in response to the pandemic in 2020 and 2021. These include changes in personal income tax, social security contributions, payroll taxes and cash benefits paid to workers.

Further information and individual country notes are available at: https://oe.cd/taxingwages.


(Source: OECD Tax)

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