Examination of the macroeconomic implicit tax rate on labour derived by the European Commission

Abstract

All tax indicator estimates, whether based on aggregate- or micro data, need to be corroborated by other information and preferably also other tax indicators before policy conclusions can reasonably be drawn. The purpose of this paper is to describe the way the (macroeconomic implicit tax rate on labour income is calculated in the European Commission Structures of the Taxation Systems in the EU? publication, to show its relationship to the widely recognised (microeconomic) tax wedge indicator for an average production worker from the "Taxing Wages" approach of the OECD, and to illustrate its use. It appears from the European Commission report that evidence from the implicit tax ratio at the macro level in a single year cannot simply be projected to observations for an average worker at the micro level, and conversely. With a few exemptions, however, both the macroeconomic and the microeconomic indicator appear to have comparable informative content as regards to general increasing or decreasing trends over time. It should be noted that the changes in the macroeconomic implicit tax rate may reflect structural changes in the entire economy, such as changes in the distribution of wage income. The implicit tax rate relates to actual tax revenue data and it could be, for example, that the revenue effect of targeted reductions in personal income tax, at say, the lower end of the income scale, has been offset by increases in wage income at the top of the wage scale. The two indicators could then be considered complementary instruments for evaluating tax policy.European Union, Tax indicators, Effective tax rates, Taxes on labour, Non-wage labour costs