Are workers paying too much tax?

By Chang Se-moon

Workers everywhere, including me, always complain about high taxes. In the July issue of “The Fiscal Fact” from the U.S. Tax Foundation, Sam Jordan and Kyle Pomerleau published an interesting article on a comparison of the tax burden on labor among OECD countries, including Korea.

The tax burden on labor is highest in Belgium at 55.6 percent. The remainder of the top 10 includes Austria (49.4 percent), Germany (49.3), Hungary (49.0), France (48.4), Italy (48.2), Finland (43.9), Czech Republic (42.6), Sweden (42.5) and Slovenia (42.5). Japan (31.9) ranks 23rd, followed by the United States (31.5) at 24th. The average of the 34 OECD member countries is 36 percent.

Where does Korea rank? The tax burden on labor in Korea is 21.5 percent, which ranks 30th among the countries. The four countries that rank below Korea are: Israel (20.5), Mexico (19.5), New Zealand (17.2) and Chile (7.0).

By the way, the total tax burden can be grouped into two components: income tax that one pays for earning, and payroll tax that one pays as part of a retirement program required by the government. Income tax is paid by workers, while payroll tax may be paid by workers alone or by workers and their employers. Payroll taxes fund programs such as Social Security, Medicare and unemployment insurance funds, although details vary by country.

The United States levies two separate payroll taxes on wage labor. The first tax is a 12.4 percent tax that is used to fund Social Security. This tax is levied on individual earnings, not on interest or dividends, up to a cap of $118,500 in 2015. This cap is adjusted to wage changes each year. Half the 12.4 percent is paid by workers and the remainder by their employers.

There is a second component of the payroll tax in the U.S., which is a 2.9 percent tax to fund Medicare. This tax has no cap and is also split evenly between employers and employees. An additional 0.9 percent Medicare payroll tax applies to wage income over $200,000, but this cap is not adjusted for inflation.

The U.S. also levies an additional payroll tax to fund unemployment insurance that pays “covered” workers when they lose their job. The tax that funds this program, however, is levied on the employer alone.

The high tax burdens on labor in most OECD countries in Europe are due to high payroll taxes, not high income taxes. The average combined (employee and employer) payroll tax rate in the OECD was 22.7 percent in 2014, which was 6.8 percent higher than the combined rate of 15.9 percent in the U.S. France had the highest combined payroll tax burden of 37.9 percent, followed by Austria and Hungary at 36.6 percent and 36.3 percent, respectively. The countries with the lowest combined payroll tax burdens were Australia (5.6 percent), Denmark (2.8), and New Zealand (0). New Zealand is the only country that does not levy a payroll tax.

Korea ranks 24th out of 34 OECD countries in terms of the payroll tax burden on labor income. Japan ranks 18th, while the U.S. ranks 25th.

In 29 of 34 OECD countries, payroll taxes made up half or more of an average single worker’s total tax burden in 2014. Korea is one of the 29, as a large portion of these taxes in Korea are paid by employers, which many workers in Korea may not recognize.

Most OECD countries provide some tax relief for families with children. The lone exception is Greece. Greece places a higher tax burden on workers with children than on workers with no children. “On average, the tax burden for families (an average of 26.6 percent in 2014) in the OECD is 25.9 percent lower than the tax burden on single, childless workers (an average of 35.9 percent).”

Ranking 33 OECD countries, other than Greece, in terms of giving the largest tax relief to families with two children relative to the tax burden on a single worker with no children, the top five countries are Belgium, France, Italy, Finland and Sweden; while the bottom five countries are Luxembourg, Ireland, Switzerland, Chile and New Zealand. Korea ranks 27th behind Japan at 21st and the U.S. at 23rd.

Let me summarize what these numbers might mean. One is that, adding income tax and payroll tax, average workers in OECD countries pay about a third of their earnings as taxes. The other is that both Korea and the U.S. have a lower tax burden on workers than most other OECD countries. Finally, OECD countries in Europe provide more government programs, but their workers pay a much higher price for them.

Chang Se-moon is the director of the Gulf Coast Center for Impact Studies.