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4.3 Description of tax rates

This section sets out the key attributes of the rate schedules for personal income tax, social security contributions and payroll taxes. The rates for the various components of wage and salary taxation impact on the tax wedge analysis.

4.3.1 Personal income tax rates

All of the OECD-10 have progressive personal income tax rates (that is, the average tax rate rises with income) with multiple rates and thresholds (progressivity is covered in greater detail in section 4.5).

Australia’s personal income tax system is progressive through the application of the A$6,000 tax free threshold and marginal tax rates for graduated levels of income. In addition, the low income tax offset ensures low income taxpayers with income up to A$21,600 have a tax free threshold of A$7,567 in 2005-06.

Based on available information, at least three of the OECD-10 automatically index their national income tax thresholds to inflation each year (Canada, the Netherlands and the United States). Canada introduced indexation of national income tax thresholds in 2000. Thresholds are indexed by the increase in the consumer price index for the period ending on 30 September of the preceding taxation year. The Netherlands indexes for inflation at the beginning of each year. The United States indexes its tax thresholds annually to inflation. Most US states do not index their tax thresholds.

Other countries do not appear from the available information to have automatic indexation based on a legislative requirement to increase thresholds in line with inflation each year and instead rely on discretionary regular adjustments or other adjustment systems. Switzerland is required to make an adjustment after the cumulative inflation rate has increased by at least seven per cent since the last adjustment. Spain indexes its tax thresholds at 2 per cent to mitigate the effects of inflation. The United Kingdom also indexes thresholds by the increase in the retail price index unless the Parliament specifies this is not to occur.

In addition to national taxes, based on available information, four of the OECD-10 levy income tax on a sub-national basis (Canada, Japan, Switzerland and the United States). Analysis of the overall personal tax burden must take into account these taxes (national and sub-national tax rate schedules are documented in Appendix 4.5). Sub-national taxes may include state or provincial taxes as well as taxes levied at a local or municipal level.

The effect of the personal income tax rates for all levels of government is included in the tax wedge analysis.

4.3.2 Social security contributions rates

Social security contributions are payments to institutions of general government that are earmarked to provide social security benefits.

Examples of social security benefits funded through social security contributions include: unemployment insurance benefits and supplements; accident, injury and sickness benefits; old-age, disability and survivors’ pensions; family allowances; reimbursements for medical and hospital expenses and provision of hospital or medical services.

Social security contributions are usually levied on both employees and employers and there are generally separate contributory structures for different types of schemes. Generally social security contributions are levied as a function of gross earnings, payroll or the number of employees.

Social security contributions are generally imposed at a flat rate, however they can be progressive or regressive. They are generally applied up to a maximum level.

Rates and maximum levels vary greatly between countries which makes comparisons difficult (detailed information is contained in Appendix 4.5 in local denomination).

The OECD reports (OECD 2001) that while income taxes are progressive in all OECD countries, employee social security contributions are either neutral or regressive, particularly at high income levels.

4.3.3 Payroll tax rates

Payroll taxes are levied on a similar basis to social security contributions and as such classified as a tax on labour. While robust incidence analysis is extraordinarily difficult, it is widespread practice to assume that taxes levied in respect of remuneration are ultimately borne by the employee.

Unlike employer social security contributions, payroll taxes are not collected for the specific purpose of funding social security programmes.

Payroll taxes can be paid by employers, employees or the self-employed either as a proportion of payroll or as a fixed amount per person.

 

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