Organisation for Economic Co-operation and Development
Tax Burden Indicators
for Labour (Taxing Wages model)
and for Capital (METR/AETR model):
W. Steven Clark
OECD Centre for Tax Policy and Administration
LAC Tax Policy Forum
16-17 September 2010, Panama City
Centre for Tax Policy and Administration
Backward-looking versus
parameter-based tax burden indicators



Policy interest in various measures of the tax burden on
labour and capital (‘tax burden indicators’).
Backward-looking indicators: derived using data on taxes
paid, as a percentage of pre-tax income (at the taxpayer or
aggregate level).
Parameter-based (forward-looking) indicators: derived from
tax calculations for representative taxpayers, based on tax
legislation (statutory tax rates, base provisions).
• Taxing Wages framework (OECD) – used to assess marginal and
average tax rates on labour income, and tax policy issues
• METR/AETR framework – used to assess marginal and average
tax rates on capital income, and tax policy issues. Recent OECD
work highlights need to account for corporate tax planning.
2
Part I - Taxing Wages framework

Taxing Wages framework - used by OECD countries to:
• Derive internationally comparable average and marginal tax rates
on labour income, for different wage levels and household types
•
•
Measure tax rates at various multiples of the average wage (AW)
Measure tax rates for single/married individuals, with/without children
•
•
Progressive personal income tax (PIT)
Regressive social security contributions (SSC)
• Compare the composition of tax rates on labour income (tax mix):
• Measure impact on tax rates of family benefits, in-work tax credits,
benefit abatement (reduction in benefits as income increases)
• Measure overall progressivity of tax burden on labour income
• Assess possible tax effects on decision to enter the labour market
(primary and secondary earners), decisions on work effort.
3
Gross and net income measures
Total labour costs
- employer social security contributions
Gross earnings
- employee social security contributions
- personal income tax
+ cash benefits
Net earnings
4
Average tax rate measures
personal income tax (PIT)
Average income tax =
gross earnings
PIT + employee SSC – cash transfers
Average income tax plus
employee SSC – cash transfers
=
gross earnings
gross earnings – net earnings
=
gross earnings
5
PIT + employee SSC – cash benefits + employer SSC
Average tax wedge =
gross earnings + employer SSC
total labour costs – net earnings
=
total labour costs
6
Marginal tax rate measures
∆ (PIT + employee SSC – cash transfers)
Marginal rate (income tax plus
=
employee SSC – cash transfers)
∆ (gross earnings)
∆ (PIT + employee SSC – cash transfers + employer SSC)
Marginal tax wedge =
∆ (gross earnings) + ∆ (employer SSC )
∆ (gross earnings) = +1 currency unit
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Consideration of different multiples of gross
wage earnings (AW) and family types:
 Single
 Single
 Single
 Single
 Married
 Married
 Married
 Married
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67% of AW
100% of AW
167% of AW
67% of AW
100% - 0% of AW
100% - 33% of AW
100% - 67% of AW
100% - 33% of AW
0 children
0 children
0 children
2 children
2 children
2 children
2 children
0 children
Comparison of average tax wedge
and components, 2007
(single, no children, 100% of AW)
Personal income tax
Employee SSC
Employer SSC
60
50
OECD average tax wedge single taxpayer at 100% of
the AW (0 children) in 2007
40
30
20
10
BEL
HUN
GER
FRA
AUT
ITA
SWE
NLD
FIN
CZE
POL
TUR
GRC
DNK
SPA
SVK
LUX
NOR
PRT
UK
CAN
US
SWI
JPN
ICL
AUS
IRL
NZL
KOR
MEX
0
9
Average tax wedge components:
Czech Republic (single, no children, 2008)
250
240
230
220
210
200
190
180
0%
170
0%
160
10%
150
10%
140
20%
130
20%
120
30%
110
30%
100
40%
90
40%
80
50%
70
50%
60
60%
50
60%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
10
employer SSC as % of total labour costs
employee SSC as % of total labour costs
average local income tax as % of total labour costs
average central income tax as % of total labour costs
family benefits as % of total labour costs
average tax wedge (sum of the components)
net personal average tax rate as % of gross wage earnings
Average tax wedge components:
Czech Republic (married, two children, 2008)
240
230
220
210
200
190
180
0%
170
0%
160
10%
150
10%
140
20%
130
20%
120
30%
110
30%
100
40%
90
40%
80
50%
70
50%
60
60%
50
60%
-10%
-10%
-20%
-20%
-30%
-30%
-40%
-40%
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employer SSC as % of total labour costs
employee SSC as % of total labour costs
average local income tax as % of total labour costs
average central income tax as % of total labour costs
family benefits as % of total labour costs
average tax wedge (sum of the components)
net personal average tax rate as % of gross wage earnings
Marginal tax wedge components:
Czech Republic (married, two children, 2008)
12
240
0%
230
0%
220
10%
210
10%
200
20%
190
20%
180
30%
170
30%
160
40%
150
40%
140
50%
130
50%
120
60%
110
60%
100
70%
90
70%
80
80%
70
80%
60
90%
50
90%
marginal employer SSC
marginal employee SSC
marginal local income tax
marginal central income tax
marginal family benefits
marginal tax wedge (sum of the components)
net personal marginal tax rate
Comparison of PIT progressivity
((PIT(167)-PIT(67))/PIT(167))*100
140
2000
2007
120
100
Statutory personal income tax progressivity:
OECD average in 2000 and 2007
80
60
40
20
AUS
AUT
BEL
CAN
CZE
DNK
FIN
FRA
GER
GRC
HUN
ICL
IRL
ITA
JPN
KOR
LUX
MEX
NLD
NZL
NOR
POL
PRT
SVK
SPA
SWE
SWI
TUR
UK
US
0
13
Comparison of PIT+SSC progressivity
((TW167-TW67)/TW167)*100
2000
2007
70
60
50
Statutory tax wedge progressivity:
OECD average in 2000 and 2007
40
30
20
10
-10
-20
14
AUS
AUT
BEL
CAN
CZE
DNK
FIN
FRA
GER
GRC
HUN
ICL
IRL
ITA
JPN
KOR
LUX
MEX
NLD
NZL
NOR
POL
PRT
SVK
SPA
SWE
SWI
TUR
UK
US
0
Extension of Taxing Wages model
to include benefit programs

Extension of TW model includes other benefit programs:

Enables calculation of net replacement rates (NRR):

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• Unemployment insurance/assistance
• Social assistance
• Housing benefits
• Family benefits
• Lone-parent benefits
• Employment-conditional benefits
• NRR= net income while out of work / net income while in work
• Proportion of in-work income maintained when unemployed.
Enables assessment of ‘unemployment traps’ and also
‘inactivity traps’ (ATR)
Part II – METR/AETR framework

METR/AETR framework - used by OECD countries to:
• Derive internationally comparable marginal and average tax rates
on capital income for different assets, industries, sources of finance
•
•
Measure tax distortions to investment and the allocation of capital
across assets (machinery, buildings, land) and locations
Domestic and cross-border METR/AETR measures
• Separately identify and assess the impact on the effective tax rate
on investment of key tax parameters influencing after-tax profits:
•
•
•
•
•
•
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Statutory corporate income tax rates
Tax depreciation methods and rates
Investment tax credits/allowances/incentives
Capital taxes
Sales taxes on capital goods
Interest deductibility, shareholder taxes (dividends, capital gains)
Applications of
METR/AETR framework
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Assess contribution of different CIT parameters (e.g. basic
statutory tax rate, tax depreciation rates) to economy-wide
and sectoral METR/AETRs.
Identify unintended tax distortions to allocation of capital –
underpins analysis of base broadening options.
Assess intended tax distortions to the level and allocation
of capital, resulting from tax incentives for investment.
Assess change in the tax burden on investment (ΔETR )
resulting from corporate tax reform.
Assess impact on investment of corporate tax reform, using
estimates of the sensitivity (tax elasticity) of investment to
METR/AETR.
Example: METR application in Canada
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Applications in LAC countries
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Taxing Wages framework may be usefully applied to
compare across LAC (and OECD) countries taxes paid on
labour income (tax mix, average, marginal tax rates), to
address labour taxation issues.
Information gathered for LAC Revenue Statistics can be
used to inform Taxing Wages modelling (e.g. treatment of
social security contributions).
METR/AETR framework may be applied to compare across
LAC countries taxation of capital income, to address tax
distortions to investment and effects of tax planning.
Use of common/agreed measures enables meaningful tax
burden comparisons to inform policy analysis/discussions.
Organisation for Economic Co-operation and Development
Thank you
Centre for Tax Policy and Administration