For some people, any tax may be a disincentive to work, but as a rule, the main tax disincentive comes from what is known as the “tax wedge” on labour. This is the difference between what employers pay out in wages and social security charges and what employees take home after tax, social security deductions and cash benefits have been taken into account. So, if your wage packet says 12 000, but your employer pays 16 000 to hire you, then the wedge is 4 000, or 25% of your cost to your employer. The size of this wedge varies, but there are signs that they are being reduced.
Tax wedges for a single worker at average earning levels ranged in 1999 from a low of 14% in Mexico and 16% in Korea to 52% in Germany and 57% in Belgium. For a married couple with one earner at average earnings and two children, they ranged from 11% in Luxembourg to 41% in Belgium and 44% in Sweden. In Iceland, the wedge was minus 2%; this is because cash benefits to such households exceeded their taxes. In other words, for these households, the government pays out more than they receive back. (See article by Willem Adema on Taxing Benefits.)
Tax wedges for one-earner married couples have fallen since 1997 in most OECD countries. Provisional estimates based on tax and benefit rates in 2000 suggest that Belgium, Germany and Sweden, along with other countries including Austria and Italy, have lowered their tax wedges by about one percentage point for most categories of wage-earners. Australia, meanwhile, has reduced wedges across the board, but with a special emphasis on households with children. Ireland has reduced wedges for all groups except single parents, who nevertheless continue to have the smallest wedge of any group in Ireland. And the UK has reduced wedges for low and average income families with children.
Source: OECD Taxing Wages 1999-2000
©OECD Observer No 230, January 2002