Fiscal wedge 2024 OECD Report

6 In Colombia, the single worker at the average wage level does not pay personal income tax. Also, contributions to pension, health, and employment risk insurances are considered to be nontax compulsory payments (NTCPs) and therefore are not included as taxes in the OECD publication. Also, contributions to pension, health, and employment risk insurance are considered to be nontax compulsory payments (NTCPs) and therefore are not included as taxes in the OECD publication. Slovakia has the largest disparity between its 41.6 percent wedge for single workers and 15.7 percent wedge for families—a difference of 25.9 percentage points.

• Higher contributions increase entitlements to pension payments and wage replacement benefits in the event of unemployment (contribution equivalence).
• If I earn £50,000 my tax wedge is zero; my marginal tax rate is 50%.The marginal rate is critically important because it affects incentives – and the UK income tax system has unfortunately created a horrible mess of marginal rates.
• In contrast, the marginal tax wedge measures that part of an increase of total labour costs that is paid in taxes and social security contributions less cash benefits.
• Taxes on wages, including both employer and employee social security charges, are a key factor in companies’ hiring decisions and individuals’ incentives to work.
• Revenues from these taxes often go toward large-scale government programs, such as Social Security and Medicare in the United States.

Tax Burden Including VAT

The OECD reports data on tax wedges on labour, which attract a great deal of attention. Much of the tax wedge is made up of equivalent pension contributions, i.e. pension contributions that are based on a close link between contributions and benefits. These pension contributions are often more akin to an investment in a compulsory pension scheme than a wage tax payment. Equivalent pension contributions are intended to dampen incentives to work to a lesser degree than taxes (see Chapter 3). Cross-country comparisons of tax wedges need to take this difference into account so that the tax component of the tax wedge can be captured in a more nuanced manner.

Second, governments levy payroll taxes on both employees and the employers, though the economic burden of both ultimately falls on wage earners. Payroll taxes are dedicated to funding programs such as Social Security, Medicare, and Unemployment Insurance funds. Taxes on wages, including both employer and employee social security charges, are a key factor in companies’ hiring decisions and individuals’ incentives to work. Individual income taxes, payroll taxes, and value-added taxes (VAT) make up a large portion of many countries’ tax revenue. Revenues from these taxes often go toward large-scale government programs, such as Social Security and Medicare in the United States.

Dividend Tax Rates in Europe, 2025

• As a result, only average earnings and half of average earnings are included in the calculation of the retirement savings component for these countries.
• Most countries in the OECD provide some targeted tax relief for families with children, typically through lower income taxes.
• The OECD’s Taxing Wages 2024 report presents both average and marginal tax wedges (MTW).
• Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.

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)-(6). Education is the process of acquiring knowledge, skills, values, and attitudes through formal or informal means. This category includes metrics such as literacy rates, enrollment rates, teacher-to-student ratio, and educational attainment. Other metrics like education spending, curriculum quality, and technological readiness are also included.

A Comparison of the Tax Burden on Labor in the OECD, 2021

The average employer-side payroll tax burden in the OECD is higher at 14.3 percent. France, which has the highest overall payroll tax rate (37.6 percent), also has the highest total effective employer-side payroll tax rate at 27.4 percent. Estonia had the second highest with an effective rate of 25.3 percent, followed by Czech Republic with a 25.2 percent rate. The highest total tax burden on wage income is in Belgium at 55.3 percent, followed by Austria (49.5 percent) and Germany (49.4 percent). New Zealand had the second lowest effective rate at 17.6 percent, followed by Mexico at 19.7 percent. The analysis in Taxing Wages 2023 focuses on full-time private sector employees.

At 100% of average earnings, 2016, % of labour costs

Because of the Euro 300 lump-sum energy price allowance, which was subject to income tax. This metric tends to show that countries with high labor burdens, such as Germany and Austria, raise revenue from labor taxes rather efficiently. These countries have labor tax wedges of 50 percent and 47 percent, respectively, but their ratios are both below the OECD average of $1.25. Although payroll taxes in the United States are split between workers and their employers, economists generally agree that both sides of the payroll tax ultimately fall on workers. Canada had the smallest difference between the two measures, at 1.6 percentage points. The OECD average tax wedge for the one-earner couple has remained flat for the last two years, at 26.6%.

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In contrast, 10 out of the 14 OECD countries with the tax burden are non-European (the United Kingdom, Switzerland, Iceland, and Ireland are the four European countries in this category). We welcome comments from readers, particularly where there are technical errors or omissions in our reports. Please try to keep the comments away from political and personal issues, and focussed on the topic of the article or report.

The burden of wage taxes in Germany, at 15 %, is more in the middle of the range and less significantly above the OECD average of 14 %. The number is derived by multiplying the OECD measure of the U.S. average labor cost of $55,457 by 91.9 percent (1 minus 8.1 percent). New Zealand provided the largest relative reduction of taxes for families with children compared to single, childless workers. The total tax burden of a married couple with two children in New Zealand (4.9 percent) was 72 percent lower than the 17.6 percent total tax burden on a single, childless worker in 2015. The countries with oecd income tax wedge chart the lowest combined payroll tax burdens were Australia (5.6 percent), Denmark (.8 percent), and New Zealand (0 percent).

Accounting for VAT rates and bases in OECD countries increases the average tax burden on labor by 5 percentage points. The distribution of rates across countries is similar to that shown in Figure 2. The country with the largest difference between the two measurements is New Zealand with a tax wedge accounting for the VAT that is 27.3 percent, 9.2 percentage points larger than the tax wedge that only accounts for income and payroll taxes. The United States has the smallest difference between the two measures, 1.8 percentage points, because state sales taxes as a share of total labor costs are generally much lower than VAT rates in other OECD countries.

Inflation rose sharply across the OECD in 2021 and 2022, reaching its highest level since 1988. These adjustments offset fiscal drag – the phenomenon whereby increases in wages result in larger tax burdens. The analysis is based on the results of a questionnaire circulated to OECD countries in 2022. In 2020, the tax wedge faced by single workers without children ranged from only 7 percent6 in Chile to 51.5 percent in Belgium, a difference of 44.5 percentage points. Fourteen of the countries had a tax wedge above 40 percent, another 14 countries between 40 and 30 percent, and nine countries below 30 percent.

In Luxembourg (1.08 p.p.), the average tax wedge increased due to the progressivity of the tax system and higher employee and employer SSCs as a result of an increased average wage, while cash benefits for children remained unchanged. In New Zealand (1.48 p.p.), a higher taper rate for the Family Tax Credit as well as an increase in the average wage caused the increase in the tax wedge. In the United States (10.6 p.p.), the tax wedge increased due to the removal of the child tax credit support measures and cash benefits introduced during the COVID-19 pandemic.