On 30 April 2020 the OECD issued the annual publication Taxing Wages 2020. This publication sets out details of taxes paid on wages in the OECD countries, covering personal income taxes and social security contributions paid by employees; social security contributions and payroll taxes paid by employers; and cash benefits received by workers.
The publication looks at the tax wedge, which measures the difference between the labour costs to the employer and the corresponding net take-home pay of the employee. The tax wedge is calculated by adding the total personal income tax and social security contributions paid by employees and employers and deducting any cash benefits received by the employee, expressed as a proportion of the total labour costs for employers.
The statistics show that in 2019 the average tax wedge for a single worker in the OECD earning the average wage was 36.0%, which was a decrease of 0.11 percentage points from 2018. There were however differences between OECD countries and the tax burden decreased in only 17 of the 36 OECD countries.
The average tax wedge for a one-earner couple in the OECD decreased by 0.07 percentage points to 26.4% in 2019.
Taxing Wages 2020 includes a Special Feature looking at whether differences in tax treatment between different types of worker can give rise to tax arbitrage opportunities. The features of a tax system may create such opportunities for firms when they are deciding on the particular form of a labour contract to offer to their staff, for example a contract for full-time employment contract or a contract for services. Tax issues may also create opportunities for individuals when choosing the form in which they will offer their services, for example a standard employment contract or self-employment.
If the arbitrage opportunities created by the tax system are sizeable the tax system may be giving an incentive for the use of certain forms of employment. This can make the tax system unfair as well as losing public revenue.
Countries therefore need to re-evaluate their tax systems and ensure that their tax policy is adapting adequately to the changing face of the labour market. Countries may need to reform their tax and benefit systems to ensure that tax considerations are not encouraging the use of particular forms of contract. It should also be noted however that the differences between forms of employment, for example the different entitlement to benefits between employed and the self-employed, may justify different tax treatment.