Which countries have the biggest tax burden?

How much of our earnings do we actually keep once taxes have been applied?

The latest survey of OECD countries reveals the nations with the highest (and lowest) tax bills.

For most employees, a pay review is a source of great anticipation, with hopes soaring for a decent pay rise.

For an Italian worker earning 38,396, the thought of a pay rise may not be so appealing. A 1% pay rise for this employee would represent a pay cut after tax – hardly an incentive for working hard for a pay rise!

A quirk in the Italian system would see this employee enter a new local taxation band, and trigger a sharp spike in tax.

This was one of the more unusual findings in The Tax Foundation’s Comparison of the Tax Burden on Labor in the OECD, which is packed with fascinating tax data.

The document compares the tax burdens or ‘tax wedges’ in the OECD countries (37* free market economies). A ‘tax wedge’ measures an employee’s take home pay as a percentage of gross pay plus any employer tax contribution.

Who has the biggest tax burden?

The first striking conclusion from the report is that Europeans have a far higher tax wedge than the rest of the world.

The average OECD tax wedge of ‘a single worker with no children earning a nation’s average wage, 2020’, is 34.6%, so around a third of earnings are paid out in tax.

A total of 23 countries have a higher tax wedge – all are European.

There are 13 countries with a lower tax wedge, of which only two are European – the UK at 30.8% and Switzerland at 22.1%.

The Tax Foundation points out that, ‘In 2020, a worker in Belgium faced a tax burden seven times higher than that of a Chilean worker.’

Are children tax deductible?

It probably isn’t correct to define a child as a tax deductible expense, but having children certainly appears to gain some tax efficiencies. Unless, that is, you live in Mexico or Chile.

Aside from Mexico and Chile, all OECD nations provide some targeted tax relief (usually on income taxes) for families with children. The average wedge for a one-earner married couple with two children, was 24.4% in 2020, compared to an average tax wedge of 34.6% for single workers.

If you are planning kids, Poland could be the place for you. The tax wedge drops from 34.8% for single workers to 13.2% for families.

Are we paying less tax?

The answer is, in general, yes.

Since 2000, the average OECD tax wedge has dropped almost 2 percentage points. Hungary has seen the biggest drop with a fall of over 11 percentage points.

The only countries to increase employees’ tax burdens are Mexico and Korea, although the increases have been from low bases. Both remain close to the bottom of the tax wedge table.

Inevitably, the pandemic has played a part in taxation policies. Between 2019 and 2020, the OECD average tax burden decreased by 0.39 percentage points, with Covid-19 playing havoc with family finances.

Indirect consequences

The tax wedge only takes into account the impact of direct taxation, but income taxes are not the end of our tax burdens. The Tax Foundation calculated that indirect taxes such as VAT added an average of 5.5 percentage points in 2020.

The VAT outliers, were New Zealand and Canada. NZ showed the highest increase of 9.2 percentage points, although Kiwis still have a low comparative tax burden even with both direct and indirect taxes taken into account.

At the opposite end of the scale, although Canada’s indirect taxes can vary according to province, the added tax burden was just 1.6 percentage points.

A level paying field?

The statistics in the report are revealing, but there are some caveats. Comparing taxation burdens in different countries can be very tricky; tax policies can be very complex.

One issue is that the report focuses on average wages, which is unsurprising as income taxes are generally progressive. The degree in which tax rates rises according to income varies vastly between nations. And there is a myriad of tax breaks and incentives that muddy the waters.

And if the tax burden in European countries looks high, it should be remembered that the gross salaries tend to be higher as well!

The figures in the report are a useful snapshot, but should be read with some caution. However, it is hard to think of a better way of comparing tax burdens across developed economies.

The report is certainly an insightful read and well worth a look. Unless you are in Belgium, that is.  In which case, you want to give this a miss!

* 36 countries were included in the report. Colombia was excluded due to its unique taxation system.

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