Tax Notes logo

Labor Taxation Rebounded in Most OECD Countries in 2021

Posted on May 25, 2022

A majority of OECD countries saw labor taxation recover in 2021 as pandemic-related economic measures, including different forms of tax relief, were rolled back, according to an OECD report.

“Taxing Wages 2022,” published May 24, shows that in 24 out of the 38 OECD countries, the tax wedge increased between 2020 and 2021 for single workers earning the average wage, largely as a result of countries scaling back COVID-19 economic and tax relief measures. The tax wedge is defined as the sum of personal income tax and social security contributions that employers and employees pay, minus cash benefits received, as a proportion of total employer labor costs.

“In almost all countries where the tax wedge increased for the single worker, the rise was driven by higher personal income tax. In some countries, this was a result of higher average wages interacting with progressive income tax systems. In others, it was driven by a higher proportion of earnings becoming subject to tax as the value of tax allowances and tax credits fell relative to the average wage,” the report says.

Even though most OECD countries saw their tax wedge increase, the average OECD tax wedge declined marginally because a small pool of countries experienced substantial decreases in their tax wedge, according to an OECD release. The average personal income tax plus social security contributions across OECD countries on a single worker was 34.6 percent in 2021, representing a decrease from 2020 of 0.06 percentage points, according to the report.

Twelve countries experienced decreases in their tax wedge, and two saw their tax wedge unchanged between 2020 and 2021, the report says.

“Tax wedges declined on average and across a majority of OECD countries in 2020 as governments implemented a range of policies in response to the COVID-19 pandemic. However, tax wedges rebounded in the majority of countries in 2021 as most of these measures were withdrawn or scaled back and average wages increased in 36 out of 38 countries,” the report says.

Finland saw the largest increase in its average tax wedge for a single worker earning the average wage between 2020 and 2021, at 1.33 percentage points, according to the report, followed by the United States (1.2 percentage points) and Israel (1.02 percentage points).

The Czech Republic, on the other hand, experienced a 4.12-percentage-point decline in its tax wedge for a single worker earning the average wage, followed by Greece (-2.23 percentage points), Latvia (-1.73 percentage points), and Australia (-1.25 percentage points). “Where the tax wedge decreased, this was primarily due to lower personal income tax in a majority of cases,” the report says.

Countries with the highest average tax wedges for single workers with no children were all clustered in the EU. Belgium topped the list for largest average tax wedge for single workers at 52.6 percent. Germany was second with 48.1 percent, followed by Austria (47.8 percent), France (47 percent), and Italy (46.5 percent). Colombia had the smallest at 0 percent, followed by Chile (7 percent) and New Zealand (19.4 percent), according to the report. Average wages for single workers increased in all OECD countries except Greece and Mexico.

The average tax wedge for a two-earner couple with two children in OECD countries was significantly lower than single workers, at 28.8 percent in 2021, but higher than the tax wedge for couples with one earner (24.6 percent) and single-parent households (15.5 percent). France had the highest tax wedge for two-earner households at 39 percent in 2021, according to the report.

Copy RID