Taxing wages: how taxes affect the disposable income of workers and wage costs of employers in OECD countries

Every worker and employer is directly affected by taxes on wages. Taxation is one of the principal ways we finance public services. It also helps us achieve important social objectives, such as redistributing wealth to address inequalities. But as the OECD’s annual Taxing Wages points out, tax policies on labour income may have an impact on individuals’ behaviour  with respect to the labour market or their consumption habits. 

Comparing the labour income taxes people actually pay among OECD countries, in particular, net personal average tax rates for single individuals and families with children, shows how taxes impact household disposable income. This can help policymakers adjust policy incentives, for instance, for people to enter the workforce or work more hours.

A worker’s gross wage is reduced by personal income taxes as well as social security contributions paid to the government to finance the likes of healthcare, unemployment benefits, pensions and other social insurance schemes. The amount of deductions differs depending on such factors as family composition, working situation and income level. A worker’s net disposable income comprises the remainder of their wage plus any cash transfers the state pays out.

In Taxing Wages, we calculate the disposable incomes of eight household types across OECD countries, including the combined impact of personal income taxes, social security contributions, and family benefits. The report places most emphasis on a single worker with average earnings and a one-earner couple at the same level of earnings with two children.

Among OECD countries, Belgium has the highest net personal average tax rate for a single worker with average earnings: 40.7%, in 2016. This means that the disposable income of the average worker in Belgium is the remaining 59.3% of their gross wage. At the other extreme, Chile has the lowest net personal average tax rate, at 7%. Thus, a single average worker in Chile takes home 93% of their gross wage.

For a one-earner couple with average earnings and two children, the net personal average tax rate is highest in Denmark (25.5%). There, the disposable household income after tax, including family benefits, comes to 74.5% of the gross wage. The lowest is in Ireland (-1.6%), where the rate is negative due to the total amount of family benefits exceeding total personal income tax  and employee social security payments. As a result, the disposable income of Irish one-earner couples with two children earning an average wage is higher than their gross wage.

Tax wedge

One important question, not least from a competitiveness view point, is how taxes affect the overall cost of hiring a worker. This means looking not just at taxes paid by workers, but the additional deductions employers have to pay as well, usually as social security contributions and payroll taxes. The sum of all this is the tax wedge, which is the difference between the employer’s cost of hiring a worker and the worker’s net disposable income. It includes personal income tax and social security contributions paid by the employee and the employer (including payroll taxes) net of family benefits. The tax wedge can be quite a high percentage of labour costs, and therefore clearly has a bearing on the hiring decisions of firms.

The OECD’s average tax wedge was 36% of labour costs in 2016 for a single average worker. The tax wedge is 26.6% for a one-earner couple with average earnings with two children. In almost every OECD country, the tax wedge is lower for one-earner couples than for single workers (see chart).

The highest tax wedge for a single worker with average earnings is in Belgium, with 54%. The lowest is in Chile, with just 7%. For one-earner couples with average earnings and two children the highest is France (40%) and the lowest is New Zealand (6.2%).

Taxing Wages provides a comprehensive overview of the effects of tax policies on the incentives on employees and employers with respect to the labour market. However, these indicators, which focus on the structure of income tax systems, do not provide a complete picture of the overall impact of the government sector on people’s welfare. For this, other factors such as indirect taxes (eg. VAT) would have to be taken into account, as would other forms of income, such as from self-employment or capital income, and other tax allowances and cash transfers not considered in Taxing Wages. The effect on welfare of services provided by the state, access to education and health facilities, and the incidence of corporate and other direct taxes on earnings and prices would also have to be considered. Readers can find more data on these aspects by visiting the OECD Tax Database (


©OECD Observer October 2017

Economic data

GDP growth: +0.6% Q1 2019 year-on-year
Consumer price inflation: 2.3% May 2019 annual
Trade: +0.4% exp, -1.2% imp, Q1 2019
Unemployment: 5.2% July 2019
Last update: 8 July 2019

OECD Observer Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Subscribe now

<b>Subscribe now!</b>

To order your own paper editions,email

Online edition
Previous editions

Don't miss

  • MCM logo
  • The following communiqué and Chair’s statement were issued at the close of the OECD Council Meeting at Ministerial level, this year presided by the Slovak Republic.
  • Food production will suffer some of the most immediate and brutal effects of climate change, with some regions of the world suffering far more than others. Only through unhindered global trade can we ensure that high-quality, nutritious food reaches those who need it most, Angel Gurría, Secretary-General of the OECD, and José Graziano da Silva, Director-General of the United Nations Food and Agriculture Organization, write in their latest Project Syndicate article. Read the article here.
  • Globalisation will continue and get stronger, and how to harness it is the great challenge, says OECD Secretary-General Gurría on Bloomberg TV. Watch the interview here.
  • OECD Secretary-General Angel Gurría with UN Secretary-General António Guterres at the 73rd Session of the UN General Assembly, in New York City.
  • The new OECD Observer Crossword, with Myles Mellor. Try it online!
  • Listen to the "Robots are coming for our jobs" episode of The Guardian's "Chips with Everything podcast", in which The Guardian’s economics editor, Larry Elliott, and Jeremy Wyatt, a professor of robotics and artificial intelligence at the University of Birmingham, and Jordan Erica Webber, freelance journalist, discuss the findings of the new OECD report "Automation, skills use and training". Listen here.
  • Do we really know the difference between right and wrong? Alison Taylor of BSR and Susan Hawley of Corruption Watch tell us why it matters to play by the rules. Watch the recording of our Facebook live interview here.
  • Has public decision-making been hijacked by a privileged few? Watch the recording of our Facebook live interview with Stav Shaffir, MK (Zionist Union) Chair of the Knesset Committee on Transparency here.
  • Can a nudge help us make more ethical decisions? Watch the recording of our Facebook live interview with Saugatto Datta, managing director at ideas42 here.
  • The fight against tax evasion is gaining further momentum as Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia signed the BEPS Multilateral Convention on 24 January, bringing the total number of signatories to 78. The Convention strengthens existing tax treaties and reduces opportunities for tax avoidance by multinational enterprises.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at .
  • Visit the OECD Gender Data Portal. Selected indicators shedding light on gender inequalities in education, employment and entrepreneurship.

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2019