Tuesday, April 04, 2006

Tax Rates Around the World

In a new report, the OECD compares taxes in different countries and finds large differences:

Belgium, Germany and Hungary impose the highest taxes among OECD countries on the pay of a single person on average earnings, while Korea, Mexico and New Zealand take the least, according to the latest edition of the OECD’s annual publication Taxing Wages....In 2005, single individuals without children earning the average wage in services and manufacturing industries faced a tax wedge of 55.4% of the cost of their labour to their employers in Belgium, 51.8% in Germany and 50.5% in Hungary, compared with 17.3% in Korea, 18.2% in Mexico and 20.5% in New Zealand.

Do these differences matter? Yes, they do, for the simple reason that people respond to incentives. Here is a summary of a study of international differences by Steven Davis and Magnus Henrekson:

A tax hike of 12.8 percentage points (one standard deviation) leads to 122 fewer hours of market work per adult per year and a 4.9 percentage point drop in the employment-to-population ratio. It also increases the size of the shadow economy by 3.8 percent of official GDP, and it reduces by 10 to 30 percent the share of national output and employment in "Retail Trade and Repairs," in "Eating, Drinking, and Lodging," and in a broader category that includes "Wholesale Trade and Motor Trade and Repair." The evidence suggests that tax rate differences among rich countries are a major reason for large international differences in market work time and in the industry mix of market activity.