ASPECTS CONCERNING LABOUR TAXATION
IN OECD COUNTRIES
Claudia Florina Radu
Western University „Vasile Goldiş” Arad
Avram Iancu Street, no 7A, Alba-Iulia, e-mail suciuclaudia@yahoo.com
Abstract
In countries with public social security systems well developed and large public expenditures, such as the EU countries, taxes on labor are high in order to support social spending, while the tax burden on capital is low. As a consequence in many countries there is a large tax wedge between labor costs of the employer and the employee's net wage. However labour tax wedge varies widely across OECD countries and the highest levels appear in: Belgium, Germany, France, Austria, Italy and Hungary, exceeding 46%. In this context the key for reducing the tax burden on labour might be lowering tax rates, broadening tax base and shifting towards indirect taxes.
Key words:income tax, tax wedge, social contributions, labour, tax burden JEL Classification:H24, H25, J32
Introduction
The paper aims to pursue all taxes (contributions and taxes) that have wages as taxable base, both for employee and employer. Such an analysis will give us an overall picture of labor costs and thus of supportability level not only for employees but also for the employers.
In countries with public social security systems well developed and large public expenditures, such as the EU countries, taxes on labor are high in order to support social spending, while the tax burden on capital is low.
In the following we will consider primarily the tax burden for employees, analyzing the share of personal income tax and employee social contributions in gross wages, taken together and split into the two components. After that we analyze the tax burden at the level of employer, considering all the social contributions, both of employee and of employer together with the personal income tax. We will refer to the tax wedge between labour costs and net take-home pay, at the level of OECD countries. After that we will determine the tax burden for an employee with average wage and also the labour tax wedge from the case of Romania, and we compare these levels with the levels of OECD countries.
Literature review
in order to improve efficiency, made by base broadening and by shifting some of the tax burden from labour to consumption was sustained by several authors, such as: Brys (2011), Forthun and Hagemann (2010), Beynet et al. (2011), Pina (2010), Beynet and Leibfritz (2009), Hrdlicka et al. (2010), Hoj (2009), Hagemann (2012), Brys, Matthews and Owens (2011).
Methodology and data
In this article we use the data provided by OECD, for countries of OECD area and we compare the level of tax burden for employee and the labour tax wedge determined for Romania with levels found for the countries of OECD area. In this way we can observe where the tax burden on labour has the highest levels and also if in our country this burden is similar with levels of OECD countries.
Tax burden at the level of employee
Chart 1 shows the personal income tax together with employee social contributions as a percentage of gross average wage, in OECD countries.
Chart 1. Percentage of gross wages paid in income tax and employees social security contributions, 2010 (%)
0 10 20 30 40
Denmark Belgium Slovenia Austria Finland Iceland UK Poland Australia Ireland Sweden Japan New Zealand Spain Switzerland Estonia Chile
income tax employee SSC
Source: self processing based on data provided by OECD, www.oecd.org
Personal income tax
Regarding the personal income tax it is to note that many countries have reduced the maximum tax rates, some even very much, although only a few of them have switched to flat tax. Czech Republic stands out among OECD countries in that the share of personal income tax and of taxes on capital in total revenue is reduced. Income tax held 10.8% of total revenue in 2008, well below the OECD average, which was of 24.9% (Hrdlicka et al., 2010, p.6).
than in other countries. Personal income tax is progressive with a five bracket structure, but it appears that much of the revenues are severely taxed. Thus more than two thirds of the income is subject to a tax rate of over 40%. On the other hand, almost 18% of all tax units do not pay income taxes. So in practice, personal income tax seems to be proportional and not progressive, with a large number of exemptions and deductions. (Hoj, 2009, p 8).
In Slovenia past reforms aimed to reduce the number of income brackets and tax rates. In 2008 it was introduced an additional general deduction that diminished the tax burden for low income individuals and special deductions were simplified.
In Korea also personal income tax has a small share compared to other countries, the fourth lowest among OECD countries. In fact here only half of the individuals pay taxes, due to large number of deductions. The maximum tax rate was reduced in 2005 from 40% to 35%, while the OECD average was of 43%. The maximum tax rate affects only incomes exceeding 3.5 times the average income and thus many taxpayers are taxed at much lower rates (Randall, 2009, p.18). So in this country the tax burden for an individual with average income is less than 5% of gross income, being the second lowest among the OECD countries. Another important aspect is that personal income tax in Korea does not discourage work participation of married women as the granted deduction is reduced and does not favor non-working spouses.
Reforming personal income tax
In 2008 in the Czech Republic a reform occurred having as purpose to simplify the tax system, reducing the tax rates and broadening tax base, and than gradually shifting towards indirect taxes. In this way the tax burden on labour could be reduced, with positive effects on human capital formation, to these contributing also the introduction of the flat tax of 15%. The flat tax introduced in 2008 came to replace the existing progressive tax, that had four progressive rates of 12%, 19%, 25% and 32%. Concomitantly occurred a reduction in social contributions by 2.5 percentage points (Hrdlicka et al., 2010, p.8). Tax reform also aimed the increase of tax credits.
In Belgium, in 2002 there was a tax reform aiming to lower the tax burden on personal income, by the following measures: increasing the standard deduction, providing tax credit for individuals with low wages, abolishing the maximum tax rates. However tax burden continues to be among the highest in the OECD area, and high tax rates discourage work incentive. In fact the top income tax rate and the average tax rate are among the highest in the OECD area.
point reduction in the average tax rate would lead to a even lower loss (Hoj, 2009, p 12 ).
In Korea, tax reform should aim increasing the share of personal income tax in total direct taxes, than broadening the tax base and expanding the tax credit introduced in 2008, which would allow reduction of primary income inequality. However should be avoided increasing of personal income tax rates, in order not to discourage labor supply (Randall, 2009, p 38).
We further comment the tax burden of social contributions. Social contributions
In Portugal appeared the problem of reducing employers' social contributions by increasing VAT and taxes on capital. This reduction would primarily aim the social contributions related to low salaries. Also it would be useful to introduce the progressivity of employers' social contributions, according to the wages level, in order to replace the current proportional rate of 23.75% with a progressive schedule with two income brackets. Then the reduction of contributions would be applied for the lower incomes bracket. For example in Hungary, in 2009 the VAT rate increased by 5 percentage points in order to finance the 5 percentage points reduction of social security contributions combined with a cut in personal income tax, without losing budget revenue (Pina, 2010, p 12).
In the Czech Republic social contributions hold a high share of total tax revenues, being of 45% in 2008 compared to an OECD average of just 25.3% and 16.2% of GDP, while in the OECD area it was of 10 %. The share is higher than in Poland too, where social contributions amounted 36% of total taxes, than in Hungary - 32% and Slovakia - 40% (Hrdlicka et al., p 6). These figures show that the Czech Republic focuses more on social contributions than on other taxes.
In the Czech Republic it is also desirable to reduce social security contributions for low income individuals. This would decrease labor costs and thus labor demand will grow. Czech Republic is among the few countries where very low wages are subject to both employees and employers social contributions. But in many countries have been implemented reductions in labour taxes for those with low incomes, with positive results for the employment of these individuals. The cost of such reductions may be financed by eliminating social contributions ceiling. In the Czech Republic it is wanted the elimination of this ceiling, as it seems to be an anomaly created by combining the ceiling of social contributions for high incomes, with the flat income tax.
In Belgium have been introduced many cuts of employers social contributions in order to improve labor market. However it is considered that the greatest effects on unemployment are obtained through measures targeting younger individuals with low income or low-wage workers generally. An interesting aspect is that in this country social contributions are not capped, but their value is high compared to other countries (Hoj, 2009, p 13). Taxes on labor reform should take into account both the social contributions and the personal income tax.
only of 5.7%, well below the OECD average, due to their relatively low rates (Randall, 2009, p 10).
Appreciations regarding the fiscal cost of labour can not exclude contributions due by the employer, observing that in most European countries there is a large difference between labor costs and net take-home pay.
Tax wedge
Chart 2 shows the income tax together with employee and employer social contributions, as percentage of total labor cost, for a single worker with average wage, in OECD countries.
Chart 2. Income tax plus employee and employer social contribution, as % of labour costs, 2010
B e lg iu m Fr a n c e G e r ma n y A u s tr ia Ita ly Hu n g a r y S w e d e n S lo v e n ia Cz e c h Re p u b lic Fin la n d Es to n ia S p a in De n ma r k Ne th e r la n d s Po r tu g a l S lo v a kia Tu r ke y No r w a y G r e e c e Po la n d L u x e mb o u r g UK Ic e la n d Ja p a n Ca n a d a US A Ir e la n d A u s tr a lia S w itz e r la n d Is r a e l K o r e a Ne w Z e a la n d Me x ic o Ch ile
0 ,0 1 0 ,0 2 0 ,0 3 0 ,0 4 0 ,0 5 0 ,0 6 0 ,0
e mp lo y e r S S C e mp lo y e e S S C in c o me ta x
Source: self processing based on data provided by OECD, www.oecd.org
exceeds 50% in Belgium, while in Mexico, Chile, New Zealand and Korea is below 20%. A moderate level of this amount differs as follows: in five countries its value is between 20% 30%, then in 14 countries the amount is between 30% -40% (in most OECD countries), while in 10 countries is between -40% - 50%. This sum actually shows the tax wedge between labor costs of the employer and the employee's net wage.
From this chart we can also observe that the mix of taxes paid out of total labour costs varies considerably between countries. Thus, the portion of labor costs paid in income tax is 0% in Chile, 2.2% in Greece, 3.7% in Korea and 3.8% in Mexico, but more than 20% in Denmark, Iceland, Belgium and Australia. The part corresponding to employees social contributions also vary widely, from 0% in Australia and New Zealand to 17.2% in Germany and 19% in Slovenia. In terms of employers' social contributions, they do not pay at all in New Zealand and Denmark, but the highest values are found in France (29.7%), Estonia (25.6%) and Czech Republic (25.4%).
In most EU countries this higher tax wedge reflects the important role played by social contributions paid from wages to finance the social security system.
In Portugal, the tax wedge has stabilized in the previous period, but for the future a possible growth of this can be expected due to the decision taken in 2010 to increase personal income tax rates.
In the Czech Republic although it is used a flat rate for personal income tax, which is relatively low, the tax wedge on labour is above the OECD average, due to high fiscal pressure exerted by social security contributions. Here there is a large differentiation of the tax wedge according to the number of family members. Thus a substantial assistance is provided for families with children, so the tax wedge for single-earner households with children is well below the OECD average (Hrdlicka et al., 2010, p 6).
However a high tax wedge will affect the employment rate, as employees, in response to lower wages, will reduce their labor supply. Also a high tax wedge could affect labor demand.
Belgium distinguishes by the fact that the tax wedge is among the highest of OECD countries. Such a high wedge increases unemployment and disadvantage those with low wages.
The tax wedge for lower salaries increases labour costs for unskilled workers and young people wishing to enter the labor market by reducing their employment opportunities. Work participation is relatively low for the young and the elderly, and these groups are more vulnerable to taxes on labor than other categories of individuals.
According to some studies, a 10 percentage point reduction in the tax wedge on labour would boost the employment rate by 3.7 percentage points. Also the increase by one percentage point of this wedge would decrease the employment rate by 0.25% (Randall, 2009, p 23). Labour taxes can reduce the hours worked, for women in particular. This explains why in Korea, lower taxes on labor do not affect hours worked, and in this country there is a low incidence of part-time work among women, being half of the OECD average. Therefore Korea should maintain a low tax wedge on labour income.
We further analyze the tax burden for an employee with average wage and then the labour tax wedge for the case of Romania. After that we compare these figures with levels in OECD area.
We will synthesize these calculations in the following table: RON
Employee Employer
Average Gross income 2117 Total employer social
contributions
569,5
Total employee social contributions
349,3 Total employee social
contributions
349,3
Income tax 242,8 Income tax +
employee SSC + employer SSC
1161,6
Income tax + SSC 592,1 Net wage 1524,9
Tax burden for employee
28% Labour costs 2686,5
Tax wedge 43,2%
Source: self processing
Results and discussions
For the case of Romania we obtained a value of 28% for the tax burden at the level of an employee with average wage. This value results by dividing the sum of income tax and employee social contributions to gross income. But analyzing data provided by OECD we determined an OECD average of 20,7% for this tax burden. So we conclude that the employee tax burden in Romania is higher than the OECD average almost with 8 percentage points. In the same time the highest level of OECD countries appears in Denmark, being of 38,6%.
for OECD countries is of 34,9%, with the highest level in Belgium (55%), followed by France (49,2%). Thus we can conclude that the labour tax wedge in Romania is very high. It is actually similar to that of Sweden (42,7%), Slovenia (42,4%), Czech Republic (42,2%) and Finland (42%). That is why in our country could be taken some measures in order to lower this high tax wedge.
Proposals for reforming the tax system
The reform of tax system could take into account broadening the tax base. Thus in Portugal, the reduction of labor costs can be achieved by increasing property taxes. It is estimated that net higher wages will stimulate labor supply, expecting a positive impact on employment rates (Pina, 2010, p 12).
In the Czech Republic it is intended the transfer of the tax burden from direct to indirect taxes, namely a reduction in taxes on labor and capital in favor of increasing taxes on consumption and wealth. Also a priority would remain the reduction of the tax wedge and of social contributions. So they have to continue the trend of cuts in the tax rates and broadening the tax base.
As Beynet mentioned for the case of Spain, a reform option could be to shift a part of the tax burden from labour to consumption, and also a decrease of social security contributions might be financed by broadening the VAT tax base (Beynet et al., 2011, p 16).
In Hungary an increase in labour supply following the reduction of the marginal rates may reflect a whitening of the economy (Forthun, Hagemann, 2010, p 23). In this country the tax policy concentrated on shifting taxation from labour to consumption, in order to improve the employment.
In Slovenia reform proposals would imply the reduction of social contributions, thus reducing the tax burden on labor, and for that should be taken into account the increase of taxes on capital and indirect taxes (Beynet, Leibfritz, 2009, p 27).
Conclusions
Despite the fiscal measures taken by OECD countries, tax burden on labor remains high. As taxes on labor produce a high tax wedge between labor costs and net wages this will decrease the employment rate. Studies show that in countries with flexible labor market, taxes on labor reverberate still on the employees, causing a reduction in net wages, while where labor market is inflexible these taxes finally affect the employers, thereby reducing work demand and employment rate or stimulating the illegal work (Leibfritz W. et all, 1997, p 9). It was however concluded that the effect of taxes on labor income reverberates more on demand than on labor supply. So labor taxes affects both supply and jobs number and it is therefore necessary as an urgent measure to reduce the tax burden on wages, which could reduce unemployment.
reduction of social contributions rates, which would improve labor demand, while eliminating the ceiling of these contributions. It is useful to mention that some countries, in order to get a fiscal relaxation of labor income, transferred the tax burden from labor to capital or other taxable base. Therefore the reduction of personal income tax can be compensated by increasing the VAT or excises. So the solution could consist in simplifying the tax system, lowering tax rates, broadening tax base and gradually shifting towards indirect taxes. In countries where labour tax wedge has higher levels, such as the UE countries, reducing of this wedge should remain a long - term priority. This applies to our country also, because as we determined by calculations, the level of employee tax burden and of labour tax wedge is very high compared to levels of OECD countries. Thus we observed that the tax wedge in Romania (43,2%) is much higher than the OECD average (34,9%). We also have to take into account the fact that in our country the level of wages is far below those in Western countries.
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