THE TAXING WAGES FRAMEWORK: AN INTRODUCTION LAC Tax Policy Forum JUNE 2015 Maurice Nettley Centre for Tax Policy and Administration, OECD

PART I: Introduction of the Taxing Wages methodology PART II: Taxing Wages model output PART III: Taxing Wages models used by other OECD Directorates The Taxing Wages Framework: an introduction 2

PART I INTRODUCTION OF THE TAXING WAGES METHODOLOGY 3

Total labour costs - employer social security contributions Gross earnings - employee social security contributions - personal income tax + cash benefits Net earnings 4

Gross earnings = fraction of the average gross wage earnings of adult, full-time both manual and non-manual workers covering industry sectors B-N (International Standard Industrial Classification of Economic Activities Revision 4) Personal income tax is tax on gross income minus allowable tax reliefs. Levies on income that are earmarked for social security funds but don’t confer an entitlement to benefit are included in the PIT. All compulsory payments that do confer an entitlement to receive a (possibly contingent) future social benefit (e.g., unemployment insurance benefits, accident, injury and sickness benefits, old-age, disability and survivor’s pension) are defined as (either employee or employer) SSC. Focus on employees and on labour income 5

A Agriculture, forestry and fishing B Mining and quarrying C Manufacturing D Electricity, gas, steam and air conditioning supply E Water supply; sewerage, waste management and remediation activities F Construction G Wholesale and retail trade; repair of motor vehicles and motorcycles H Transportation and storage I Accommodation and food service activities J Information and communication K Financial and insurance activities L Real estate activities M Professional, scientific and technical activities N Administrative and support service activities O Public administration and defense; compulsory social security P Education Q Human health and social work activities RArts, entertainment and recreation SOther service activities TActivities of households as employers; undifferentiated goods- and services-producing activities of households for own use UActivities of extraterritorial organizations and bodies International Standard Industrial Classification, Rev.4 6

personal income taxes Average income tax = gross earnings PIT + employee SSC – cash transfers Average income tax plus = employee SSC – cash transfers gross earnings (Net personal average tax rate) gross earnings – net earnings = gross earnings Tax measures 7

PIT + employee SSC – cash benefits + employer SSC Average tax wedge = gross earnings + employer SSC total labour costs – net earnings = total labour costs Tax measures (2) 8

∆ (PIT + employee SSC – cash transfers) Net personal marginal tax rate = (income tax plus employee SSC ∆ (gross earnings) – cash transfers) ∆ (PIT + employee SSC – cash transfers + employer SSC) Marginal tax wedge = ∆ (gross earnings) + ∆ (employer SSC in response) ∆ (gross earnings) = +1 currency unit Tax measures (3) 9

Single 67% of AW 0 children Single100% of AW0 children Single167% of AW0 children Single67% of AW2 children Married100% - 0% of AW 2 children Married100% - 33% of AW 2 children Married100% - 67% of AW 2 children Married100% - 33% of AW 0 children Focus on different family types: 10

PART II TAXING WAGES MODEL OUTPUT 11

Germany 2013: average tax wedge decomposition by level of gross earnings expressed as a % of the average wage 12

Germany 2013: marginal tax wedge decomposition by level of gross earnings expressed as a % of the average wage 13

France 2013: average tax wedge decomposition by level of gross earnings expressed as a % of the average wage 14

France 2013: marginal tax wedge decomposition by level of gross earnings expressed as a % of the average wage 15

Switzerland 2013: average tax wedge decomposition by level of gross earnings expressed as a % of the average wage 16

Switzerland 2013: marginal tax wedge decomposition by level of gross earnings expressed as a % of the average wage 17

Ireland 2013: average tax wedge decomposition by level of gross earnings expressed as a % of the average wage 18

Ireland 2013: marginal tax wedge decomposition by level of gross earnings expressed as a % of the average wage 19

Top statutory personal income tax rates, 2014 *. These countries have a flat Personal Income Tax rate Source: 20

Trends in personal income tax Taxing Wages Special Feature 2011 Income threshold where a single individual starts paying income tax (multiple of the average wage) 1,2 1. Multiple of the average wage where the average combined central and sub-central personal income tax liability first becomes positive for single taxpayers without children claiming (only) standard tax reliefs. 2. Countries are ranked by decreasing threshold in * The value for Chile is 140% of the AW in 2010 and 149% of the AW in

Average income tax progressivity ((T167-T67)/T167)*100 From aTaxing Wages Special Feature 22

Average tax wedge progressivity ((TW167-TW67)/TW167)*100 From a Taxing Wages Special Feature 23

Income tax progressivity Taxing Wages Special Feature 2013 Average tax rate progression in 2011 for single taxpayers without children By income intervals 24

Income tax progressivity (2) Taxing Wages Special Feature 2014 Change in the average tax wedge progression over time in Germany For 6 household types, by income intervals 25

Change in tax burdens over time Taxing Wages Special Feature

Taxes = compulsory unrequited payments to general government Taxing Wages models taxes levied on wage earnings that are “generally applicable” to the taxpayers included in the Taxing Wages report. NTCPs = requited and unrequited compulsory payments to privately-managed funds, welfare agencies or social insurance schemes outside general government and to public enterprises; + requited compulsory payments to general government made by employees or employers Non-tax compulsory payments (NTCPs) 27

compulsory (requited and unrequited) payments to privately- managed funds, to other bodies, welfare agencies or social insurance schemes outside general government and to public enterprises Included in the Taxing Wages models pension payments health insurance Others (family allowance, burial fee, discharge and old age insurance, unemployment insurance) Not included in the Taxing Wages models Employer work-related private insurance to cover accidents and occupational diseases Non-tax compulsory payments (2) 28

Non-tax compulsory payments (3) Average compulsory payment wedge and average tax wedge For single average workers without children, Countries are ranked by decreasing average compulsory payment wedge. Source: 29

WHAT IS THE EFFECT OF BRACKET CREEP? 30

Bracket creep in Luxembourg: single taxpayer ( ) 31

Bracket creep in Iceland: single parent ( ) 32

PART III TAXING WAGES MODELS USED BY OTHER OECD DIRECTORATES 33

Unemployment insurance Unemployment assistance Social assistance Housing benefits Family benefits Lone-parent benefits Employment-conditional benefits Benefits and Wages publication: including additional benefits in the Taxing Wages framework 34

Net replacement rates (NRR) measure to what extent tax-benefit regulations assure income adequacy in case of loss of employment. NRR = net income while out of work / net income while in work NRRs compare total family income between two different work situations of one particular household member. They capture the degree of income protection provided by both the tax-benefit system (and any incomes of other household members) Net replacement rates 35

Net replacement rates of unemployment benefit, 2013 Source: 36

Net replacement rates of unemployment benefit over a five-year period, 2013 Source: 37

Net replacement rates of unemployment benefit recipients over a five- year period, 2013 (II) Family qualifies for cash housing assistance and social assistance "top ups" Source: 38

AETRs measure by how much benefits decrease and taxes increase when moving from unemployment/inactivity to employment Does it pay to take up a job? change in net income AETR = 1 – change in gross income Participation tax rate (Average effective tax rate) 39

Participation tax rates for a transition into full-time work, 2013 For persons receiving unemployment benefits Source: 40

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