Labor taxation rebounds as global economy recovers from COVID-19 pandemic
24/05/2022 – Effective tax rates on labor rebounded in 2021 as the global economy recovered and many countries began to withdraw or reduce measures implemented in response to the coronavirus pandemic. COVID-19, according to a new report from the OECD.
Taxing wages 2022 shows that rising household incomes in 2021, coupled with the reversal of many pandemic-related tax and social policies, have led to an increase in effective taxes on wages across the OECD. This marks a turnaround from 2020, when the pandemic led to a significant drop in the labor tax wedge – defined as total labor taxes paid by both employees and employers, less family benefits, in percentage of the cost of labor for the employer.
The report shows an increase in the tax wedge in the majority of OECD countries in 2021, with many countries withdrawing or reducing measures introduced to support households during the pandemic. Despite these increases, the average tax wedge across the OECD has fallen slightly, as relatively large declines in the tax wedge have been observed in a small number of countries where new COVID-19 support measures have been implemented. introduced in 2021.
In most countries, increases in the tax wedge in 2021 more than offset the sharp declines recorded in 2020 for a number of household types, and saw the tax wedge rebound to higher levels than in 2019 before the pandemic. For a single-earner couple earning 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 higher 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 fell by 1.2 percentage points over 2019-21, while that of the lone parent on 67% of the average wage with two children decreased by 1 percentage point. Both of these declines were greater than that of the single worker without children, for whom the tax wedge fell by 0.3 percentage points to 34.6%.
Between 2020 and 2021, the single worker tax wedge increased in 24 of the 38 OECD countries, fell in 12 and remained the same in two. Increases exceeded one percentage point in Israel, the United States and Finland, while decreases exceeded one percentage point in Australia, Latvia, Greece and the Czech Republic. In almost all countries where the tax wedge rose for this type of household, the rise was fueled by an increase in personal income tax, as rising average wages interacted with the progressivity of tax systems.
The tax wedge for single-earner households on the average wage with two children increased in 27 countries, decreased 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. Declines of more than one percentage point were seen in five countries, with the largest drop in Chile (by 25.5 percentage points) due to Emergency Family Income, a temporary COVID-19 support measure.
The gap between the average OECD tax wedge for the single worker and the one-earner couple with children widened by 0.36 percentage point between 2020 and 2021 to reach 10.2 percentage points.
Taxing wages 2022 provides unique international comparative data on income tax paid by employees, cash benefits received by working families, and social security contributions and associated payroll taxes paid by employees and employers as a whole OECD, which are key factors when individuals consider their employment options and companies make hiring decisions.
The report illustrates how these taxes are calculated and examines the impact on household incomes. It allows cross-country comparisons of labor costs and the overall tax and benefit position for eight different types of households, varying by income level and household composition (single persons, single parents, with one or two incomes, with or without children).
This year’s report includes a special chapter on how labor taxation has responded to economic shocks related to the COVID-19 pandemic. It pays particular attention to what has driven changes in key 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, social charges. and cash benefits paid to workers.
Further information and country notes are available at: https://oe.cd/taxingwages.
Media inquiries should be directed to David Bradbury, Head of the OECD Tax Policy and Statistics Division (+33 1 4524 1597), or Lawrence Speer (+33 1 4524 7970) from the OECD Media Office. the OECD (+33 1 4524 9700).
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Working with more than 100 countries, the OECD is a global policy forum that promotes policies aimed at improving the economic and social well-being of people around the world.
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