Which Country Has The Lowest Taxes - A significant source of tax revenue for most countries comes from taxes on wage income through personal income taxes and payroll taxes.[1] Most industrialized countries have progressive income taxes, meaning that people with higher incomes are taxed at higher rates than people with lower incomes. However, many countries still place a significant tax burden on middle-income earners. Although these taxes, especially payroll taxes, pay for important government programs, it is important to know how much these programs cost the average worker.
Currently, single workers earning the median wage in the United States with no children face a tax burden of 31.7 percent. This is lower than the average among 34 OECD countries of 35.9 percent. The average tax burden on workers in the OECD is high mainly due to high payroll taxes. In the United States and other OECD countries, the tax burden on workers with children is lower than that of single workers without children with similar pre-tax incomes.
Which Country Has The Lowest Taxes
There are two main types of taxes paid by wage earners in the United States. First, federal, state, and sometimes local governments levy personal income taxes to finance general government operations. Second, governments levy payroll taxes on both employees and employers, although the financial burden ultimately falls on the wage earner. Payroll taxes are dedicated to funding programs such as Social Security, Medicare, and unemployment insurance funds.
How Low Are U.s. Taxes Compared To Other Countries?
Federal personal income tax is the most familiar aspect of payroll taxes in the United States. The federal income tax has a progressive rate structure with minimum rates for individual filers, from 10 percent on the first $9,275 of taxable income to 39.6 percent on income of $415,050. In 2013, 77 percent of taxpayers fell into the first two brackets. , and less than 1 percent of taxpayers paid the maximum rate.[2]
In addition to federal income tax, 43 states and the District of Columbia tax personal income.[3] Local governments in 17 states also levy personal income tax.[4]
The United States imposes two major payroll taxes on wages and salaries. The first tax is a 12.4 percent tax to finance social security (Table 2). This tax is levied on the first dollar a person earns on wages and self-employment income up to $118,500 in 2016. This limit is adjusted every year for salary changes. On paper, employers pay half the tax and employees pay half.
The second tax is a 2.9 percent payroll tax to fund Medicare. This tax is levied starting from the first dollar of income but without any limit. Like the Social Security payroll tax, this tax is split equally between employers and employees. An additional 0.9 percent Medicare payroll tax applies to wage income above $200,000 (this threshold is not adjusted for inflation).[5]
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Unemployment insurance is a joint federal-state social insurance program that insures workers against unexpected loss of income due to job loss. The tax that funds this program is a payroll tax levied on employers.
The federal unemployment tax is 6 percent on the first $7,000 of wages. However, states also set UI tax rates to fund their portion of the program. State UI tax rates and rates can vary significantly. The difference is based on how often workers from the same employer receive unemployment benefits. If the employer is likely to hire and fire his employees at a rate higher than the normal rate, the employer faces a higher tax rate. For example, Kentucky taxes employers on the first $8,000 of a worker's wages at a rate between 1 and 10 percent. In contrast, Alaska taxes the first $34,000 of wages at a rate between 1 and 5.4 percent.
However, federal and state tax rates are not additive. Employers can credit up to 90 percent of their state taxes against federal taxes, reducing the federal rate by 0.6 percent.[6]
Although payroll taxes in the United States are split between workers and their employers, economists generally agree that both sides of the payroll tax ultimately fall on workers.
At A Glance
In tax policy, there is an important distinction between the "legal" and "economic" incidence of taxation. Legal tax liability falls on the party who is legally required to write a check to the tax collector.
However, the party legally paying the tax is not the party ultimately bearing the tax burden. The "economic" incidence of a tax can fall on any number of people and determines the relative elasticity of supply and demand for the taxed good, or how people and businesses respond to the tax.
A classic example of the difference between the legal and economic incidence of taxation is the excise tax on cigarettes. Legally, cigarette manufacturers pay this tax. However, it is generally accepted that smokers will ultimately bear the burden of this tax. Because when producers face this excise tax, they increase the price they charge for cigarettes. Since most smokers do not respond significantly to the higher price, they buy the same amount of cigarettes at the new price. Therefore, producers are able to shift more of the financial burden of the tax onto their consumers.
The distinction between the legal and economic incidence of taxation applies to payroll taxation. Legally, employers pay more than half of payroll taxes. Most economists agree, however, that payroll taxes on the part of employers ultimately fall on workers in the form of lower wages.[7] This reflects the general consensus that employers are more sensitive to taxation than workers.[8] Empirical work on the incidence of payroll taxes finds that low-wage workers pay all or most of the payroll tax.[9]
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Each year, the OECD conducts a survey on the labor tax burdens of all 34 member countries. The OECD calculates these burdens by adding income tax payments, employees' payroll tax payments, and employers' payroll tax payments. [10] The OECD then divides this figure by the total labor costs of this average worker, or what the worker would have earned without those three taxes. This is called the average tax wedge of labor income.
In 2015, the OECD found that the average worker in the United States faces a tax burden of 31.7 percent, including income and payroll taxes.[11] The OECD estimates that the average US worker paid an effective personal income tax rate of 16.5 percent and an effective additional payroll tax rate of 15.1 percent in 2015 (7 percent on the employee side and 8.1 percent on the employer side). . The median worker in this case was a single worker without children who earned an annual income of $50,964 [13].
A 31.7 percent tax for a US worker equates to an average personal income tax bill of $9,167 and an average payroll tax bill of $17,558 to $8,391. The result is an after-tax income of $37,899.
Workers earning average wages in other industrialized nations have a higher tax burden than workers in the United States
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Compared to the United States, other OECD countries impose a relatively high tax burden on average wages. The OECD has an average tax rate of 36 percent on middle income earners. This is about 4.3 percentage points higher than the US tax rate of 31.7 percent, which is the 26th highest in the OECD.
The total tax burden on wage income is 55.3 percent in Belgium, followed by Austria (49.5 percent) and Germany (49.4 percent). Chile has the lowest overall tax rate on labor at 7 percent. New Zealand has the second lowest effective rate at 17.6 percent, followed by Mexico at 19.7 percent.
Payroll tax burdens are generally high in the OECD and constitute a significant portion of the labor tax bill
As in the United States, payroll taxes in other OECD countries go toward financing social insurance programs. These programs, especially in Europe, cost a significant amount of money.[14] As a result, most OECD countries have high average tax burdens on workers due to high payroll taxes.
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The average combined payroll tax rate in the OECD (employees and employers) was 22.7 percent in 2015, 7.6 points higher than the combined US rate of 15.1 percent. France had a combined payroll tax burden of 37.8 percent. Hungary follows with a payroll tax burden of 36.6 percent and Austria with a payroll tax burden of 36.4 percent. The payroll tax burdens of those three countries are greater than the total tax burden on workers in the United States.
Countries with the lowest combined payroll tax burdens are Australia (5.6 percent), Denmark (.8 percent), and New Zealand (0 percent). New Zealand is the only country that does not tax
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