Salary constitutes the main source of income for individuals, and like all income, work earnings are subject to various types of taxes: income tax, payroll taxes, and consumption taxes such as VAT – which form a large portion of the tax revenues in many countries. The combination of these taxes creates the tax burden on labor. In this article, we will review the tax burden on the world of work, specifically the tax burden on labor in European countries that are members of the OECD. This article is based on OECD data (Taxing Wages 2020) which shows that on average, a single worker without children earning an average salary will face a tax burden of 36%. When adding consumption taxes, the total tax burden increases to 41.5%.
In many countries, the tax system is progressive, meaning the higher the salary, the higher the tax burden. Additionally, the tax burden on families can sometimes be lower than that of a single person without children earning at the same level. In light of all this, there is a negative relationship between the tax burden on labor and therefore, countries need to explore ways to reduce the tax burden in order to improve the efficiency of their labor markets.
The tax burden on labor
Represents the difference between the cost of an employee to the employer and the employee’s net income. The OECD calculates the tax burden on labor by combining income tax, employer and employee payroll taxes (based on the average salary in the country). This figure is divided by the total labor cost and the employee’s gross salary.
Payroll taxes
Usually at a fixed rate, are taxes paid in addition to the income tax that the individual pays. In most OECD countries, both the employee and the employer pay taxes on wages. These taxes are typically intended for social programs such as national insurance, health insurance, and old-age insurance.
Although payroll taxes are split between the employee and employer, the tax burden on the salary usually falls entirely on the employee’s shoulders. In tax policy, there is an important distinction between the legal and economic aspects of tax. The legal responsibility lies with whoever signs the paycheck, namely the employer. However, the party legally responsible for paying the tax is not always the one who actually bears it. The economic aspect of the tax can fall on several people but is mainly dependent on supply and demand in the labor market and how individuals and businesses respond to the tax.
A single worker compared to a married worker with children
Most OECD countries provide tax reliefs focused on families with children, usually through income tax reliefs. The average tax burden for a family (salary of a married couple with two children) was 26.4% in 2019, compared to an average tax burden of 36% for a single worker without children. Countries with a higher tax burden generally provide more tax reliefs for families.
In summary, in 2019, a single worker without children paid a third of their salary on average in taxes; if consumption taxes like VAT are considered, the tax burden would be even higher. There is also a variation in the tax burden depending on the nature of the work (salaried or self-employed). Countries with a high tax burden usually justify the level of the burden with extensive social programs, however, the cost of these programs can amount to half of the average worker’s salary and at least a third of it.
These taxes need to be considered when a person works abroad (especially in Europe), as they are exposed to income tax and payroll taxes on their work income produced in a foreign country. Before starting employment, it is recommended to consult with accountants/lawyers specialized in international taxation to consider all the options available to you and to prevent various forms of double taxation. Our office specializes in international taxation and advising individuals on various aspects of taxation.
Below is a table of the rates of tax burden on labor in European OECD member countries: (updated for the year 2019).
Tax burden rates for labor in various European OECD member countries(as of 2019):
Belgium: 52.2%
Germany: 49.4%
Italy: 48%
Austria: 47.9%
France: 46.7%
Hungary: 44.6%
Czech Republic: 43.9%
Slovenia: 43.6%
Sweden: 42.7%
Latvia: 42.6%
Finland: 41.9%
Slovakia: 41.9%
Portugal: 41%
Greece: 40.8%
Spain: 39.5%
Turkey: 39.1%
Luxembourg: 38.4%
Netherlands: 37.3%
Estonia: 37.2%
Lithuania: 37.2%
Norway: 35.7%
Poland: 35.6%
Denmark: 35.4%
Ireland: 33.2%
Iceland: 33.1%
United Kingdom: 30.6%
Switzerland: 22.3%
Source: OECD website, as referenced by [y-tax.co.il](http://y-tax.co.il)
