THE TAXING WAGES FRAMEWORK:

AN INTRODUCTION

LAC Tax Policy Forum16-17 JUNE 2015

Maurice NettleyCentre for Tax Policy and Administration, OECD

• PART I: Introduction of the Taxing Wages

methodology

• PART II: Taxing Wages model output

• PART III: Taxing Wages models used by other

OECD Directorates

The Taxing Wages Framework:an introduction

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 earnings4

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.

Focus on employees and on labour income

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• 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

International Standard Industrial Classification, Rev.4

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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

Tax measures

7

PIT + employee SSC – cash benefits + employer SSC

Average tax wedge =

gross earnings + employer SSC

total labour costs – net earnings

=

total labour costs

Tax measures (2)

8

∆ (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

Tax measures (3)

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• Single 67% of AW 0 children• Single 100% of AW 0 children• Single 167% of AW 0 children• Single 67% of AW 2 children

• Married 100% - 0% of AW 2 children• Married 100% - 33% of AW 2 children • Married 100% - 67% of AW 2 children • Married 100% - 33% of AW 0 children

Focus on different family types:

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PART II

TAXING WAGES MODEL OUTPUT

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Germany 2013: average tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

12

Germany 2013: marginal tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

13

France 2013: average tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

14

France 2013: marginal tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

15

Switzerland 2013: average tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

16

Switzerland 2013: marginal tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

17

Ireland 2013: average tax wedge decompositionby level of gross earnings expressed as a % of the average

wage

18

Ireland 2013: marginal tax wedge decompositionby 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 taxTaxing 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 liabilityfirst 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.

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0

20

40

60

80

100

120

140

AU

S

AU

T

BEL

CAN

CZE

DN

K

FIN

FRA

GER

GRC

HU

N

ICL

IRL

ITA

JPN

KOR

LUX

MEX

NLD NZL

NO

R

POL

PRT

SVK

SPA

SWE

SWI

TUR

UK

US

2000 2007

Statutory personal income tax progressivity: OECD average in 2000 and 2007

Average income tax progressivity((T167-T67)/T167)*100

From aTaxing Wages Special Feature

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-20

-10

0

10

20

30

40

50

60

70

AU

S

AU

T

BEL

CAN

CZE

DN

K

FIN

FRA

GER

GRC

HU

N

ICL

IRL

ITA

JPN

KOR

LUX

MEX

NLD NZL

NO

R

POL

PRT

SVK

SPA

SWE

SWI

TUR

UK

US

2000 2007

Statutory tax wedge progressivity: OECD average in 2000 and 2007

Average tax wedge progressivity((TW167-TW67)/TW167)*100

From a Taxing Wages Special Feature

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Income tax progressivity Taxing Wages Special Feature 2013

Average tax rate progression in 2011 for single taxpayers without childrenBy income intervals

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Income tax progressivity (2)Taxing Wages Special Feature 2014

Change in the average tax wedge progression over time in GermanyFor 6 household types, by income intervals

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Change in tax burdens over timeTaxing Wages Special Feature 2010

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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

Non-tax compulsory payments (NTCPs)

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compulsory (requited and unrequited) payments to privately-managed 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

Non-tax compulsory payments (2)

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Non-tax compulsory payments (3)

Average compulsory payment wedge and average tax wedgeFor 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 29

WHAT IS THE EFFECT OF

BRACKET CREEP?

30

Bracket creep in Luxembourg: single taxpayer (2000-2006)

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

% 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

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Bracket creep in Iceland: single parent (2000-2006)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30

40

50

60

70

80

90

100

110

120

130

140

150

160

170

180

190

200

210

220

% 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

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PART III

TAXING WAGES MODELSUSED BY OTHER

OECD DIRECTORATES

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• Unemployment insurance

• Unemployment assistance

• Social assistance

• Housing benefits

• Family benefits

• Lone-parent benefits

• Employment-conditional benefits

Benefits and Wages publication: including additional benefits in the Taxing Wages

framework

34

• 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)

Net replacement rates

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Net replacement rates ofunemployment benefit, 2013

Source: http://www.oecd.org/els/benefits-and-wages-statistics.htm 36

Net replacement rates ofunemployment benefit over a five-year period,

2013

Source: http://www.oecd.org/els/benefits-and-wages-statistics.htm 37

Net replacement rates ofunemployment benefit recipients over a five-

year 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

• 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

Participation tax rate(Average effective tax rate)

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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 40

THANK YOU