Tax Policy Is Widening the Gender Gap
With British politicians, led by Prime Minister David Cameron, making public their tax affairs, the OECD’s new Taxing Wages report could not have come at a better time. For those tired of Piketty-style class warfare, the report comes as a welcome departure. Move over, class warriors: It’s single people and women who really lose out from our tax and benefit systems.
Economists often look at the tax wedge -- the difference between the total labor costs to an employer and the net take-home pay of the corresponding employee. Income taxes are just one of a number of factors that can drive a wedge between the two figures, reducing incentives to employment. The tax wedge calculated by the OECD captures much more: the sum of income tax, social security contributions (paid by the employer and the employee) and payroll taxes, netted for any cash transfers (or “benefits”), all expressed as a proportion of the labor cost. The higher the tax wedge, the greater is the overall tax on labor.
Comparing OECD member countries on the basis of taxes, benefits and labor costs, the report allows us to see how taxes on labor have changed in recent years and how they vary across countries and by household type. Looking at the last 15 years, the study finds that the tax wedge on labor income has declined to 35.9 percent from an average value of 36.9 percent for a single person without children, and to 26.7 percent from 27.5 percent for a single-earner married couple with two children. That is, taxes have come down, but they still show marked differences both by country and by household type.
In 2015, the tax wedge for a single person without children varied from a low of 7 percent in Chile to a high of 55.3 percent in Belgium. In the U.K., the U.S. and Japan, the tax wedge -- 30.8 percent, 31.7 percent and 32.2 -- was below the OECD average of 35.9 percent. This average figure reflects a whopping 48 percent tax on labor in a number of the larger European countries.
None of this comes as a particular surprise. What is more interesting is what happens when we compare different family types, from single individuals without children to an average married couple with two kids and secondary versus primary earners. These different categories help to reveal battle lines over tax that go well beyond the usual debate over class and inequality.
Comparing the tax wedge for a single person with that of a family of two children allows us to see how generously tax and benefit systems treat households with children relative to those without. The average tax wedge for a two-child family in the OECD with one adult earning the average wage was 26.7 percent of total labor cost in 2015, which is 9.2 percentage points lower than the average for a single person without children. While in the U.S., the difference is slightly greater, in the U.K. it is significantly less so, with the difference being only 4.5 percentage points. Clearly, countries vary a lot in terms of how they choose to treat households with children compared with those without but, in general, single people lose out; the tax system is nudging us into partnership and parenthood.
However, single people are not the only ones who lose out. Perhaps the most interesting part of the report is the special feature concerning the impact of the tax and benefits system on the incentive to work of the second earner in a household.
As the OECD notes, where governments choose to tax family income instead of individual income, “the second earner is effectively taxed at higher marginal tax rates than a single individual would be,” disincentivizing paid employment. Where countries provide tax allowances and tax credits to families (both of which are regularly justified on the grounds of equity), they come with a similar adverse effect, as has been the case in Italy.
Quantitatively speaking, the difference in tax between primary and secondary earners is certainly significant. For a family with two children in which the primary earner is receiving the average wage, the tax wedge on the secondary earner (who is assumed to earn two-thirds of the average wage) was 37.8 percent across the OECD in 2014. This compares with 26.7 percent for the primary earner, a difference of over 10 percentage points.
Where the majority of secondary earners are women, this means that women are being taxed more than men, which raises issues of fairness and potentially affects women’s labor force participation. According to a report published last year by the European Commission, fiscal disincentives facing female secondary earners are a particular problem in Belgium, Germany, Slovenia, Portugal and Luxembourg. Three of that list -- Belgium, Germany and Luxembourg -- have a high proportion of women in part-time as opposed to full-time roles. Joint tax filing (or joint elements) in these countries also means that the tax effectively paid by the second earner is dependent on -- rather than independent of -- the income of the primary earner.
It seems that the tax and benefit system is implicitly working against the achievement of gender equality in the workforce. Rather than blame the private sector for exacerbating inequality, it might be time for the state to look more carefully at how its own labor market interventions are impacting the gender gap.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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