If an employer is likely to hire and fire her employees at a higher than normal rate, the employer will face a higher tax rate. For example, Kentucky taxes employers for the first $8,000 of a worker’s wages at rates between 1 and 10 percent. In contrast, Alaska taxes the first $34,000 in wages at rates between 1 and 5.4 percent. Effective tax rates for seven of these eight household types rose slightly on average across OECD countries in 2024; for each of the seven, the average tax wedge has now risen to its level in 2019, prior to the COVID-19 pandemic. In 2020, effective tax rates fell sharply due to falls in average wages and temporary measures introduced by OECD countries to support households during the pandemic. In 2020, the tax wedge faced by single workers without children ranged from only 7 percent in Chile to 51.5 percent in Belgium, a difference of 44.5 percentage points.
- Rates and several layers of social security contributions can create marginal tax rate spikes that can distort or change incentives to work.
- In Colombia, the single worker at the average wage level does not pay personal income tax.
- The calculations here are based on OECD data on pension contribution rates and gross replacement rates.
Lack of family-based relief amplifies the burden
The OECD average VAT-inclusive tax wedge is 41.1 percent, compared to a VAT-exclusive tax wedge of 36.1 percent. When macroeconomic aggregates, rather than certain types of household, are compared to one another, Germany still counts among the countries with larger tax wedges. According to the European Commission, Germany’s implicit tax on labour income as a percentage of total compensation of employees is slightly above the middle of the table, ranking eighth. In methodological terms, it differs from the calculations presented above with regard to the components that it takes into account.
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In 30 out of 37 OECD countries, total payroll taxes accounted for a larger share of the tax burden on labor than income taxes did. Australia, Denmark, Iceland, Ireland, New Zealand, and the United States were the only countries in which the share from income taxes exceeded payroll taxes. A tax wedge can also be used to calculate the percentage of market inefficiency introduced by sales taxes.
- In 8 countries, while only the United States recorded an increase larger than 1 p.p., which was due to the withdrawal of COVID-19 benefits.
- The variation is based on how frequently an individual employer’s workers receive unemployment benefits.
- The tick up to 31.4% in 2025 is thanks to the rise in employer national insurance in the October 2024 Budget.
- For example, Anglo-Saxon and Scandinavian countries, in particular, primarily finance their social security benefits through taxes.
The OECD data show that the gross replacement rates of the pension systems in individual countries vary considerably in some cases (see Charts 3.4 and 3.5 for selected European countries and the United States). This interactive chart plots tax wedge against % of average income for the ten largest European OECD members, plus the US and Canada. You can change the taxpayer type with the dropdown at the top right, and add/remove countries by clicking on the legend on the right hand side. The greater the rate of tax wedge, the higher is the possibility for the same to be present in an informal sector instead of the formal sector. Supply CurveSupply curve represents the relationship between quantity and price of a product which the supplier is willing to supply at a given point of time. It is an upward sloping curve where the price of the product is represented along the y-axis and quantity on the x-axis.
Tax wedges are particularly high in European countries—the 24 countries with the highest tax burden in the OECD are all European. In contrast, 10 out of the 14 OECD countries with the lowest tax burden are non-European (the four European countries in this category are the United Kingdom, Switzerland, Iceland, and Ireland). Whilst the 12.1% rate may oecd income tax wedge chart seem high, it is still well below the figures seen in France (26.7%) or Belgium (21.3%). Conversely, Ireland (10%) and Switzerland (6%) apply much lower charges to employers. Zawisza (2022), Labor supply and the pension contribution link, NBER Working Paper No 30184. However, the party that legally pays a tax is not always the one that ultimately bears the burden of the tax.
A Comparison of the Tax Burden on Labor in the OECD, 2017
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 U.S. Tax Burden on Labor, 2019
In others (like the US) there’s a child tax credit that is refundable in cash for taxpayers on low income. The tax wedge calculation takes all credits and cash benefits/transfers into account. With two children, and a dual-earner family with two children.5where one earner is on the average wage and the other on two-thirds of the average wage. Accounting for state sales taxes, the U.S. tax wedge is 31.5 percent, slightly above the 29.6 percent tax wedge without state sales taxes.
Data calculation/treatment
The tax wedge for one-earner families with children is lower than for single people without children in all OECD countries except Chile and Mexico, where tax levels are the same for both. The gap is over 15% of labour costs in Belgium, Canada, the Czech Republic, Germany, Ireland, Luxembourg, New Zealand and Slovenia. Although the tax wedge has changed quite substantially in some countries over time, the average OECD tax burden on labor has dropped just 1.8 percentage points over the past two decades.
The following figure compares the tax burden faced by a one-earner married couple with two children with that of a single worker without children. The OECD average described above reflects the overall tendencies of the tax burden on labor among the 38 OECD countries. Insured persons’ confidence in the long-term sustainability of the pension system is crucial – it is necessary for pension contributions to actually be perceived as retirement provision rather than tax.
It’s interactive, so you can click on a point and see the precise numbers, and reorder the chart using the dropdown box at the bottom right. Travel refers to the ease, safety, and attractiveness of visiting a place for tourism or other purposes. This category includes metrics such as transportation infrastructure, accommodation quality, and natural and cultural attractions. There are also articles covering tourism industry competitiveness, hospitality, and sustainability. Military refers to the armed forces and their role in protecting national security and interests.
Such contributions differ from wage taxes and should have less of a negative impact on incentives to work. If contributions to a pension insurance scheme are closely linked to benefits based on contribution equivalence, they are more akin to investments in a compulsory pension scheme. Although this initially reduces take-home pay, larger contributions grant entitlement to higher benefits in the future.
Tax wedges are particularly high in European countries—the 23 countries with the highest tax burden in the OECD are all European. In contrast, 10 out of the 14 OECD countries with the tax burden are non-European . It is indirect because the manufacturer or provider of the goods or services has to charge the purchaser tax for the item, and pass the payment on to the government – unlike a direct government tax. The U.S. tax wedge fell by 2.2 percentage points in 2018, from 31.8 percent in 2017 to 29.6 percent.
Due to rounding, the changes in tax wedge in column (2) may differ by one-hundredth of a percentage point from the sum of columns (3)-(5). For Canada, Denmark and the United States, cash benefits contribute to the difference as they are not included in columns (3)-(5). Post-tax incomes increased in almost three-quarters of OECD countries in 2024, as real wages recovered and labour taxes increased slightly, according to a new OECD report.
