Tax systems ‘lack progressivity’

Tax systems in developed countries generally become less progressive at higher income levels, says a new working paper from the OECD in Paris.

The paper presents statutory tax progressivity indicators for the 34 OECD member countries in 2011 – on the basis of average effective income tax rates and also tax 'wedges' (that is, taking into account social security contributions, payroll taxes and cash benefits). Average rate progression is calculated for four different household types: single people without children, one-earner married couples without children, lone parents with two children, and one-earner married couples with two children. The progression rate is given for five income bands between 50 and 200 per cent of the average.   

Key points

  • There is a general pattern of decreasing tax progressivity across income levels, although considerable differences exist between countries. In most countries, however, the top average rate progression can be found at the bottom income interval, and the lowest average rate progression at the top income interval.
  • In some countries, the tax system becomes regressive when the social security contribution ceiling is reached.
  • Child benefits increase progressivity (especially at low income levels). The effect of cash benefits, which reduce the tax wedge, and the fact that these benefits are typically phased out when income increases, results in an increase in (local) tax progressivity in a large majority of OECD countries. Their effect is larger than the flattening impact of social security contributions, except at top income levels.
  • Reductions in social security contributions targeted at low incomes and dependant spouse allowances increase progressivity in some OECD countries. Income-splitting systems typically have the opposite effect.

Source: Dominique Paturot, Kirsti Mellbye and Bert Brys, Average Personal Income Tax Rate and Tax Wedge Progression in OECD Countries, Taxation Working Paper 15, Organisation for Economic Co-operation and Development