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. According to the OECD, the tax wedge ranges from just over 15% in Mexico for a single worker on an average wage, to just over 55% in Belgium.
Tax Wedge for Families
The tax wedge is 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.
Single parents with two children in new Zealand have the lowest tax wedge, at -16.5%, followed by Ireland at -9.5% and Canada at -7.7%. At the high end of the spectrum is France, at 36.8%, and Greece, at 36%.
For couples with no children (at 100% and 33% of average wages, respectively), Hungary has the highest tax wedge-at 49.8%—and Mexico has the lowest—at 13.4%.
Tax Wedge and Employment
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 study in 2005 of the EU8 countries (the eight Eastern European countries that joined the EU in 2004—comprising the 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.
According to the OECD's Taxing Wages 2009 Report: "Many countries cut income taxes, especially for lower-income households and/or households with children, thereby reducing tax wedges. Some countries also reduced employer social security contributions to encourage firms to retain employees, rather than resorting to lay-offs."
However, in some countries a lower average tax wedge simply reflected lower average wages as a result of the financial and economic crisis.
Between 2008 and 2009 Switzerland saw the largest drop in the tax wedge for a single person on an average wage, dropping -2.7%, followed by Sweden and the Czech Republic at -1.6%—according to the OECD Taxing Wages Report 2010. For a two-parent family with one wage earner and two children, the greatest drop was seen in the Slovak Republic—dropping -2.6%. In New Zealand the tax wedge for two-child families with one wage earner dropped -2.5% and in Turkey it dropped -2.4%.
At the other end of the spectrum, single individuals with no children in Ireland saw the greatest increase in the tax wedge—it rose 1.5% between 2008 and 2009. For families with two children and a single income Ireland again saw the greatest increase in the tax wedge—going up 2%.