Employer social security contributions drive increase in tax burden, OECD reports

Increases in employer social security contributions drove the average tax burden on wage earners in OECD countries up slightly in 2012, according to data released by the Organisation for Economic Co-operation and Development (OECD) on Tuesday. Higher personal income tax rates in 13 countries also contributed to the increasing tax burden.

The average tax and social security burden across the 34 countries in the study was 35.6% in 2012. It increased in 19 countries, fell in 14 countries and remained unchanged in one. The 2012 increase of 0.1% was smaller than 2011’s 0.5% increase.

The tax burden is measured by the “tax wedge” as a percentage of labour costs. The tax wedge represents the difference between an employer’s labour costs and the employee’s corresponding net take-home pay. To calculate the tax wedge, the OECD takes the sum of personal income tax, employee plus employer social security contributions, and any payroll tax, minus benefits.

Belgium (56%), France (50.2%), Germany (49.7%) and Hungary (49.4%) recorded the highest average tax burden for workers who are single and childless and earning the average wage. Chile (7%), New Zealand (16.4%) and Mexico (19%) recorded the lowest. In the United States, the tax burden on a single, childless taxpayer was 29.6%; in the UK it was 32.3%.

France (43.1%), Greece (43%), Belgium (41.4%) and Italy (38.3%) had the highest tax burden for families with one wage earner (earning the average wage) and two children. New Zealand (0.6%), Ireland (6.4%), Chile (7%) and Switzerland (9.5%) had the lowest. In the United States, the tax burden for these families was 18.4%; in the UK it was 27.9%. Japan recorded the largest tax burden increase for one-earner families with children (2.4% increase) due to the abolition of certain tax allowances for dependants.

Driving the increase: Social security contributions

The main drivers of the 2012 increase were increases to the employer social security contribution rate in eight countries, led by a 1.2% increase in Poland, a 0.8% increase in the Slovak Republic, and a 0.6% increase in the Netherlands. Those countries recorded three of the highest increases in tax burden in 2012.

In 13 of the 19 countries in which the tax burden rose, personal income taxes also rose. This increase was greatest in Spain (1.4% increase) and Australia (0.6% increase). However, in countries where the tax burden fell, lower personal income taxes were the main cause.

The OECD reported that employer social security contributions are a large percentage of labour costs in many OECD countries. The highest is France, where employer social security contributions represent 30.6% of labour costs, and another 10 countries have percentages over 20%: Austria, Belgium, the Czech Republic, Estonia, Greece, Hungary, Italy, the Slovak Republic, Spain and Sweden.

Only three countries have no required employer social security contributions: Chile, Denmark, and New Zealand. The OECD average is 14.4%.

There is also a wide range in employees’ social security contributions as a percentage of labour costs. In Australia and New Zealand, it is 0%, but in Germany it is 17.3% and in Slovenia it is 19%. The OECD average is 8.2%.

Together, employer and employee social security contributions exceed 20% of labour costs in more than half the OECD countries and exceed 33% in seven countries: Austria, Belgium, the Czech Republic, France, Germany, Greece and Hungary.

For the years 2000–2010, the total tax wedge for a single, childless wage earner decreased from 36.7% to 35%, before rebounding in 2011.

—Alistair M. Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.