Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Tax Burden Indicators for Labour (Taxing Wages model) and for Capital ( METR/AETR model): LAC Tax Policy Forum September 2010, Panama City W. Steven Clark OECD Centre for Tax Policy and Administration

Backward-looking versus parameter-based tax burden indicators  Policy interest in various measures of the tax burden on labour and capital (‘tax burden indicators’).  Backward-looking indicators: derived using data on taxes paid, as a percentage of pre-tax income (at the taxpayer or aggregate level).  Parameter-based (forward-looking) indicators: derived from tax calculations for representative taxpayers, based on tax legislation (statutory tax rates, base provisions). Taxing Wages framework (OECD) – used to assess marginal and average tax rates on labour income, and tax policy issues METR/AETR framework – used to assess marginal and average tax rates on capital income, and tax policy issues. Recent OECD work highlights need to account for corporate tax planning. 2

Part I - Taxing Wages framework  Taxing Wages framework - used by OECD countries to: Derive internationally comparable average and marginal tax rates on labour income, for different wage levels and household types Measure tax rates at various multiples of the average wage (AW) Measure tax rates for single/married individuals, with/without children Compare the composition of tax rates on labour income (tax mix): Progressive personal income tax (PIT) Regressive social security contributions (SSC) Measure impact on tax rates of family benefits, in-work tax credits, benefit abatement (reduction in benefits as income increases) Measure overall progressivity of tax burden on labour income Assess possible tax effects on decision to enter the labour market (primary and secondary earners), decisions on work effort. 3

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

personal income tax (PIT) Average income tax = gross earnings PIT + employee SSC – cash transfers Average income tax plus = employee SSC – cash transfersgross earnings gross earnings – net earnings = gross earnings Average tax rate measures 5

PIT + employee SSC – cash benefits + employer SSC Average tax wedge = gross earnings + employer SSC total labour costs – net earnings = total labour costs 6

∆ (PIT + employee SSC – cash transfers) Marginal rate (income tax plus = employee SSC – cash transfers) ∆ (gross earnings) ∆ (PIT + employee SSC – cash transfers + employer SSC) Marginal tax wedge = ∆ (gross earnings) + ∆ (employer SSC ) ∆ (gross earnings) = +1 currency unit Marginal tax rate measures 7

 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 Consideration of different multiples of gross wage earnings (AW) and family types: 8

Comparison of average tax wedge and components, 2007 (single, no children, 100% of AW) 9

Average tax wedge components: Czech Republic (single, no children, 2008) 10

Average tax wedge components: Czech Republic (married, two children, 2008) 11

Marginal tax wedge components: Czech Republic (married, two children, 2008) 12

Comparison of PIT progressivity ((PIT(167)-PIT(67))/PIT(167))*100 13

Comparison of PIT+SSC progressivity ((TW167-TW67)/TW167)*100 14

Extension of Taxing Wages model to include benefit programs  Extension of TW model includes other benefit programs: Unemployment insurance/assistance Social assistance Housing benefits Family benefits Lone-parent benefits Employment-conditional benefits  Enables calculation of net replacement rates (NRR): NRR= net income while out of work / net income while in work Proportion of in-work income maintained when unemployed.  Enables assessment of ‘unemployment traps’ and also ‘inactivity traps’ (ATR) 15

Part II – METR/AETR framework  METR/AETR framework - used by OECD countries to: Derive internationally comparable marginal and average tax rates on capital income for different assets, industries, sources of finance Measure tax distortions to investment and the allocation of capital across assets (machinery, buildings, land) and locations Domestic and cross-border METR/AETR measures Separately identify and assess the impact on the effective tax rate on investment of key tax parameters influencing after-tax profits: Statutory corporate income tax rates Tax depreciation methods and rates Investment tax credits/allowances/incentives Capital taxes Sales taxes on capital goods Interest deductibility, shareholder taxes (dividends, capital gains) 16

Applications of METR/AETR framework  Assess contribution of different CIT parameters (e.g. basic statutory tax rate, tax depreciation rates) to economy-wide and sectoral METR/AETRs.  Identify unintended tax distortions to allocation of capital – underpins analysis of base broadening options.  Assess intended tax distortions to the level and allocation of capital, resulting from tax incentives for investment.  Assess change in the tax burden on investment ( Δ ETR ) resulting from corporate tax reform.  Assess impact on investment of corporate tax reform, using estimates of the sensitivity (tax elasticity) of investment to METR/AETR. 17

Example: METR application in Canada 18

Applications in LAC countries  Taxing Wages framework may be usefully applied to compare across LAC (and OECD) countries taxes paid on labour income (tax mix, average, marginal tax rates), to address labour taxation issues.  Information gathered for LAC Revenue Statistics can be used to inform Taxing Wages modelling (e.g. treatment of social security contributions).  METR/AETR framework may be applied to compare across LAC countries taxation of capital income, to address tax distortions to investment and effects of tax planning.  Use of common/agreed measures enables meaningful tax burden comparisons to inform policy analysis/discussions. 19

Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Thank you