“The Tax Wedge: How Worker Salaries Are Impacted by OECD Country Taxes”

2023-04-28 05:03:54

The tax cost that a worker must pay as a percentage of their salary in member countries of the Organization for Economic Co-operation and Development (OECD) increased in 2022, according to a latest report from the agency.

This means that today an average wage earner in the member countries is having to pay more tax on the labor income they receive. However, this varies considerably in many countries, depending on their tax regulations.

Belgium is the member country where its workers they allocate a higher percentage of their salary for taxes, with 53%; while, in Latin countries like Colombia, this indicator is 0%.

To give you an idea, in general 34.6% of the salary of an average employee in OECD countries is going to pay social contributions and taxes, once social benefits are subtracted, the report explains. This indicator increased in 23 of the 38 countries of the organization, fell in 11 and remained stable in the remaining four.

What was it due to? To an “incomplete adaptation of the parameters of the tax system to inflation,” explains the international organization. And it is that the annual price rise in member countries rose 9.6% in 2022, compared to 4% in 2021.

In this way, the “tax wedge”, which measures salary taxation, was as follows in the block: as mentioned, Belgium is the member country where the highest percentage of salary goes to pay taxes; it is followed by Germany (47.8%) and France (47%).

The Netherlands (0.69 points) and the United Kingdom (0.54) had the largest increases, while the main decreases were registered in nations such as Hungary (-3.03 points), Slovakia (-0.15) and Greece ( -0.10).

In total, 13 OECD countries have labor taxation of more than 40%.

“In a large part of the bloc’s member countries, the ‘tax wedge’ increased for inflationary reasons and the effect this has on the increase in nominal wages and therefore in the payment of labor taxes. Statistically it is an accounting effect, and in real terms, it became less favorable for many citizens to enter the labor market,” said Sebastián Trujillo, an expert on OECD issues.

This is why Taxing Wages 2023, as the official report is called, shows that while nominal wages rose, high inflation across the OECD caused wages to fall in real terms, dealing a double whammy for workers. And it is that the study indicates that real salaries fell an average of 3.3% per year as a result of “strong inflation”.

However, the biggest rise is taking place more pronouncedly in eight types of households, such as those with children and more modest salaries, the annual report points out.

“With inflation reaching its highest level in more than 30 years in 2022, the new analysis shows that effective tax rates increased in most member countries across a range of income levels and household types, with a significant increase for families with children, particularly in the lowest income levels”, the bulletin reads.

In a particular scenario, in several Latin countries this burden is minimal. According to Mauricio Salazar, an expert in tax matters, that 0% in Colombia is because “the OECD definition treats it that way. But technically speaking, there are workers’ contributions to social security; what happens is that the OECD does not count them in taxes”. In the regional ranking, Chile is penultimate with just 7% of “tax wedge”, while Mexico is in fourth place, with 20.4% and an increase of 0.19 percentage points. Costa Rica reaches 29.2% (position 30).

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