On 25 April 2023 the OECD published Taxing Wages 2023, containing the latest annual analysis of tax rates on income from labour in the OECD. The analysis shows that the effective tax rates on labour income rose on average in the countries of the OECD in 2022. This created more pressure on workers who are already being hit by increasing rates of inflation, causing real wages to decline in value.

The results of the latest survey indicate that the tax wedge increased for the household types covered by the report in most OECD countries in the period under review. The tax wedge 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 largest increases in the tax wedge affected households with children; and were particularly noticeable at lower income levels. The results of the survey indicate that governments must consider policies to mitigate fiscal drag, in other words they must ensure that the tax system applicable to workers is adapted to take account of the effects of inflation.

The results indicate that for the single worker earning the average wage, the average tax wedge in OECD countries in 2022 remained at 34.6%, the same as the previous year. The only country that showed an increase of more than 1% in the tax wedge for the single worker was the US where the tax wedge increased by 2.2 percentage points, due to the cessation of Covid benefits. In most other countries where the tax wedge increased for the single worker the increase was mainly due to personal tax increases.

The survey also calculated the average tax wedge for a two-earner couple with two children, with one adult earning 100% of the average wage and the other earning 67%. The tax wedge for this household type increased by 0.45 percentage points between 2021 and 2022, reaching 29.4%. The tax wedge increased in 24 countries, decreased in 13 and remained the same in one.

The average tax wedge for a couple with only one earner and two children saw a greater increase in the period, by 1.05 percentage points to reach 25.6%.

The average tax wedge increased the most in this period for a single parent of two children earning 67% of the average wage. For this type of household, the tax wedge increased by 1.61 percentage points to 16.6%, increasing in 31 of the 38 OECD countries.