The tax wedge is the ratio of total labor taxes to total labor costs. It is often lower for families with children and single parents with children than for individuals or couples without children. The tax wedge has an impact on employment growth.

Author: Valentina Pasquali
Project Coordinator: S.J. Yun

One common method of evaluating tax differentials between countries is by comparing marginal tax rates.

Another point of comparison is the tax wedge.

In its simplest form, the tax wedge is the difference between the net earnings that a worker takes home at the end of the year and what it costs to employ that worker. The World Bank defines it as the ratio of total labor taxes to total labor costs.

For the employer, this includes the employee’s salary and employer social security contributions—such as healthcare and pension contributions. For the employee, the negative balance includes income tax and employee social security payments, and the positive balance includes taxable income salary and other cash benefits.

But the tax wedge is also affected by a number of other factors, including marital status, spouse’s earnings and having children. Many countries offer fiscal advantages to families or single parents, and often the lowest tax wedge will be for single parents with a low salary and with two or more children.

According to research in OECD countries, there is a negative relationship between the size of the tax wedge and employment: as the tax wedge increases, employment growth figures go down. The World Bank found, in a 2005 study of the EU8 countries (the eight Eastern European countries that joined the Union in 2004— Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic and Slovenia) that for each 1% increase in the tax wedge, there was an associated 0.5%-0.8% drop in employment growth figures. Between 2008 and 2009, many countries reduced the tax wedge for some—or all—taxpayers, which may help contribute to stimulation of employment figures.

If Chile had the lowest tax wedge in the OECD ranking for a single person (7%) in 2013, New Zealand came right after (16.9%). On the other hand, Germany (49.3%) had the second highest individual tax wedge after Belgium (55.8%.) At the same time, for a one-earner married couple with two children the tax wedge is lowest in New Zealand (2.4%,) and again Chile (7%) and highest in France (41.6%) and then Belgium (41%).

(Values expressed in percentage)

Single person at 100% of average earnings,
no child
One-earner married couple at 100%
of average earnings,
2 children
Australia 27.41 16.92
Austria 49.12 38.43
Belgium 55.8 41.03
Canada 31.06 18.73
Chile 7 7
Czech Republic 42.38 20.5
Denmark 38.24 27.56
Estonia 39.9 32.31
Finland 43.12 38.08
France 48.92 41.59
Germany 49.33 33.75
Greece 41.56 44.5
Hungary 49.03 34.1
Iceland 33.45 19.09
Ireland 26.6 6.82
Israel 20.66 17.41
Italy 47.78 38.17
Japan 31.64 26.1
Korea 21.41 18.97
Luxembourg 37.01 14.32
Mexico 19.22 19.22
Netherlands 36.94 30.82
New Zealand 16.89 2.41
Norway 37.34 31.18
Poland 35.56 29.82
Portugal 41.15 29.77
Slovak Republic 41.13 27.64
Slovenia 42.34 23.09
Spain 40.66 34.81
Sweden 42.93 37.69
Switzerland 21.99 9.49
Turkey 38.64 37.45
United Kingdom 31.48 27.02
United States 31.33 20.27
OECD - Average 35.85 26.35

© OECD 2014 


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