THE TAXING WAGES FRAMEWORK:
AN INTRODUCTION
Maurice Nettley
Centre for Tax Policy and Administration, OECD
LAC Tax Policy Forum
16-17 JUNE 2015
The Taxing Wages Framework:
an introduction
• PART I: Introduction of the Taxing Wages methodology
• PART II: Taxing Wages model output
• PART III: Taxing Wages models used by other OECD
Directorates
2
PART I
INTRODUCTION OF THE
TAXING WAGES METHODOLOGY
3
Total labour costs
- employer social security contributions
Gross earnings
- employee social security contributions
- personal income tax
+ cash benefits
Net earnings
4
Focus on employees and on labour
income
Gross earnings = fraction of the average gross wage earnings of
adult, full-time both manual and non-manual workers covering
industry sectors B-N
(International Standard Industrial Classification of Economic
Activities Revision 4)
Personal income tax is tax on gross income minus allowable tax
reliefs. Levies on income that are earmarked for social security
funds but don’t confer an entitlement to benefit are included in the
PIT.
All compulsory payments that do confer an entitlement to receive
a (possibly contingent) future social benefit (e.g., unemployment
insurance benefits, accident, injury and sickness benefits, old-age,
disability and survivor’s pension) are defined as (either employee
or employer) SSC.
5
International Standard Industrial
Classification, Rev.4
•
A
Agriculture, forestry and fishing
•
B
Mining and quarrying
•
C
Manufacturing
•
D
Electricity, gas, steam and air conditioning supply
•
E
Water supply; sewerage, waste management and remediation activities
•
F
Construction
•
G
Wholesale and retail trade; repair of motor vehicles and motorcycles
•
H
Transportation and storage
•
I
Accommodation and food service activities
•
J
Information and communication
•
K
Financial and insurance activities
•
L
Real estate activities
•
M
Professional, scientific and technical activities
•
N
Administrative and support service activities
•
O
Public administration and defense; compulsory social security
•
P
Education
•
Q
Human health and social work activities
•
R
Arts, entertainment and recreation
•
S
Other service activities
•
T
Activities of households as employers; undifferentiated goods- and services-producing activities of households for own use
•
U
Activities of extraterritorial organizations and bodies
6
Tax measures
personal income taxes
Average income tax =
gross earnings
PIT + employee SSC – cash transfers
Average income tax plus
=
employee SSC – cash transfers
gross earnings
(Net personal average tax rate)
gross earnings – net earnings
=
gross earnings
7
Tax measures (2)
PIT + employee SSC – cash benefits + employer SSC
Average tax wedge =
gross earnings + employer SSC
total labour costs – net earnings
=
total labour costs
8
Tax measures (3)
∆ (PIT + employee SSC – cash transfers)
Net personal marginal tax rate =
(income tax plus employee SSC
∆ (gross earnings)
– cash transfers)
∆ (PIT + employee SSC – cash transfers + employer SSC)
Marginal tax wedge =
∆ (gross earnings) + ∆ (employer SSC in response)
∆ (gross earnings) = +1 currency unit
9
Focus on different family types:
•
•
•
•
Single
Single
Single
Single
67% of AW
100% of AW
167% of AW
67% of AW
•
•
•
•
Married
Married
Married
Married
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
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PART II
TAXING WAGES MODEL OUTPUT
11
Germany 2013: average tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
12
Germany 2013: marginal tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
13
France 2013: average tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
14
France 2013: marginal tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
15
Switzerland 2013: average tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
16
Switzerland 2013: marginal tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
17
Ireland 2013: average tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
18
Ireland 2013: marginal tax wedge decomposition
by level of gross earnings expressed as a % of the average
wage
19
Top statutory personal income tax rates, 2014
*. These countries have a flat Personal Income Tax rate
Source: http://www.oecd.org/tax/tax-policy/tax-database.htm
20
Trends in personal income tax
Taxing Wages Special Feature 2011
Income threshold where a single individual starts paying income tax
(multiple of the average wage)1,2
1. Multiple of the average wage where the average combined central and sub-central personal income tax liability
first becomes positive for single taxpayers without children claiming (only) standard tax reliefs.
2. Countries are ranked by decreasing threshold in 2010.
* The value for Chile is 140% of the AW in 2010 and 149% of the AW in 2000.
21
Average income tax progressivity
((T167-T67)/T167)*100
From aTaxing Wages Special Feature
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
22
Average tax wedge progressivity
((TW167-TW67)/TW167)*100
From a Taxing Wages Special Feature
2000
2007
70
60
50
Statutory tax wedge progressivity:
OECD average in 2000 and 2007
40
30
20
10
-10
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
-20
23
Income tax progressivity
Taxing Wages Special Feature 2013
Average tax rate progression in 2011 for single taxpayers without children
By income intervals
24
Income tax progressivity (2)
Taxing Wages Special Feature 2014
Change in the average tax wedge progression over time in Germany
For 6 household types, by income intervals
25
Change in tax burdens over time
Taxing Wages Special Feature 2010
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Non-tax compulsory payments (NTCPs)
Taxes = compulsory unrequited payments to general government
Taxing Wages models taxes levied on wage earnings that are “generally
applicable” to the taxpayers included in the Taxing Wages report.
NTCPs =
requited and unrequited compulsory payments to privately-managed
funds, welfare agencies or social insurance schemes outside general
government and to public enterprises;
+
requited compulsory payments to general government made by
employees or employers
27
Non-tax compulsory payments (2)
compulsory (requited and unrequited) payments to privatelymanaged funds, to other bodies, welfare agencies or social
insurance schemes outside general government and to public
enterprises
Included in the Taxing
Wages models
•
pension payments
•
health insurance
•
Others (family allowance, burial fee, discharge and old age
insurance, unemployment insurance)
Not included in the
Taxing Wages models
Employer work-related private insurance to cover accidents and
occupational diseases
28
Non-tax compulsory payments (3)
Average compulsory payment wedge and average tax wedge
For single average workers without children, 20141
1.
Countries are ranked by decreasing average compulsory payment wedge.
Source: http://www.oecd.org/tax/tax-policy/tax-database.htm
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WHAT IS THE EFFECT OF
BRACKET CREEP?
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Bracket creep in Luxembourg:
single taxpayer (2000-2006)
3%
2%
1%
0%
-1%
-2%
-3%
-4%
% of AW
-5%
actual change in the average tax wedge (2000 - 2006)
tax burden effect of legislative tax policy
Tax Burden Effect of Real Earnings Growth
Tax Burden Effect of Bracket Creep
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
-6%
31
Bracket creep in Iceland:
single parent (2000-2006)
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
% of AW
actual change in the average tax wedge (2000 - 2006)
tax burden effect of legislative tax policy
Tax Burden Effect of Real Earnings Growth
Tax Burden Effect of Bracket Creep
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
-25%
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PART III
TAXING WAGES MODELS
USED BY OTHER
OECD DIRECTORATES
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Benefits and Wages publication: including
additional benefits in the Taxing Wages
framework
• Unemployment insurance
• Unemployment assistance
• Social assistance
• Housing benefits
• Family benefits
• Lone-parent benefits
• Employment-conditional benefits
34
Net replacement rates
• Net replacement rates (NRR) measure to what extent
tax-benefit regulations assure income adequacy in case
of loss of employment.
• NRR = net income while out of work / net income
while in work
• NRRs compare total family income between two
different work situations of one particular household
member. They capture the degree of income protection
provided by both the tax-benefit system (and any
incomes of other household members)
35
Net replacement rates of
unemployment benefit, 2013
Source: http://www.oecd.org/els/benefits-and-wages-statistics.htm
36
Net replacement rates of
unemployment benefit over a five-year period,
2013
Source: http://www.oecd.org/els/benefits-and-wages-statistics.htm
37
Net replacement rates of
unemployment benefit recipients over a fiveyear period, 2013 (II)
Family qualifies for cash housing assistance and social assistance "top ups"
Source: http://www.oecd.org/els/benefits-and-wages-statistics.htm
38
Participation tax rate
(Average effective tax rate)
• AETRs measure by how much benefits decrease
and taxes increase when moving from
unemployment/inactivity to employment
• Does it pay to take up a job?
change in net income
• AETR = 1 –
change in gross income
39
Participation tax rates for a transition
into full-time work, 2013
For persons receiving unemployment benefits
Source: http://www.oecd.org/els/benefits-and-wages-statistics.htm
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THANK YOU