Where does the collection come from in the OECD? Spain is already the third country that earns the most of the worker

Spain is already the third country of the Organization for Economic Cooperation and Development (OECD) that collects the most through workers. 61.3% of the State’s total income comes from Personal Income Tax (IRPF) and social security contributions. The data is 10.9 points higher than the OECD average, which stands at 50.4%. Only the United States and Germany have a tax system that gives a higher percentage of revenue to these two taxes.

According to the latest data from the OECD, on average, countries extract 24% of their income through personal income tax, along the lines of Spain, which earn 23.8%. However, the Spanish tax wedge -the sum of IPRF and social contributions- is triggered by social contributions. While the OECD presents an average of 26.4%, in Spain they reach 37.5% of the total collection.

On the other hand, consumption taxes, such as VAT, account for most of the tax revenue in the OECD, 32.1% of the total. In Spain, on the other hand, VAT barely collects 26.7% of total State revenue. In this way, the tax system of our country penalizes income and work more than consumption and property.

“The mix of tax policies can influence how distorting or neutral a tax system is,” says Daniel Bunn, vice president of Global Projects at the Tax Foundation. “Income taxes can create more economic damage than excise and property taxes,” he adds. Unlike Spain, OECD countries generally rely more on tax revenue from consumption taxes. Then, they extract from social contributions and personal income tax. Lastly, they come from Corporate Taxes -9.2%- and Wealth Taxes -5.6%-.

Compared to 1990 data, OECD countries, on average, have become more dependent on social contributions -an increase of 3.1 percentage points- and less dependent on personal income tax -a decrease of 6 percentage points-. “These policy changes are important,” says Daniel Bunn. “Social contributions generally have broader bases and lower rates and personal income tax often has higher tax rates and can further distort workers’ decisions,” he adds.

More prominence of the IS

On the other hand, OECD countries are also now more dependent on income from Corporate Tax. This has happened despite a overall decrease in corporate tax rates Worldwide. One cause of this change has been a change in the mix of OECD member countries. Since 1994, 14 countries have joined the OECD. Of this group, Colombia, Mexico and Chile obtain more than 20% of their income from corporate tax. The average share of income from Corporation Tax among the other 35 OECD countries is 7.7%.

On the other hand, The United States is the only developed country that does not have VAT. Instead, most US state executives and many local governments apply a retail sales tax on the final sale of products and excise taxes on the production of goods such as cigarettes and alcohol. The lack of a VAT makes the United States an outlier, collecting only 16.9% of total government revenue from consumption taxes, while the OECD average is nearly double that amount with a 32.1%.

“While tax revenues have been affected by the pandemic, many OECD countries are already seeing a recovery not only in growth measures but also in tax revenues,” says Daniel Bunn. “As the recovery continues, governments need to pay close attention to how revenues rise and avoid policy changes that could stifle an economic recovery or be a complex burden on people and businesses.”

The tax wedge

Social Security and IRPF contributions already reach 39.3% of the salary of the average Spanish worker. The sum of these two concepts, which is known as the tax wedge, exceeds the average by 4.7 points of the countries of the Organization for Economic Cooperation and Development (OECD), which stands at 34.6%. In this way, the net salary that the employee finally receives is 60.7% of the labor cost. According to OECD data, the fact that the tax wedge in Spain exceeds the OECD average is due to the social contributions paid by companies, which are significantly higher in our country. Thus, in Spain, Social Security contributions by companies account for 29.9% of gross salary, according to 2020 data, compared to 16.3% on average in the OECD, making our country the seventh of a total of 37 analyzed with the social contributions in charge of the highest companies.

“A higher tax wedge in relation to other countries, as is the case in Spain, implies a higher labor cost for companies, which can have several negative implications for our economy”, explain the specialists from the Institute of Economic Studies (IEE) in its White Paper for tax reform. “First of all, a higher labor cost may imply a deterioration in the competitiveness of the economy. And, secondly, higher labor costs can have a negative impact on the generation of employment by our business fabric,” they add.

In addition, the maximum marginal rate of Spanish personal income tax exceeds the European average by more than 10 points. The section that taxes the highest incomes reaches 54% in Spain, while the average in the countries of the European environment is 43.3%. Spain is thus among the four countries that tax income the most in the last sections.

This is what the latest OECD reports and the Worldwide Tax Summaries from PwC. In Europe, only nine countries exceed the 50% barrier in the maximum marginal rate of personal income tax. Denmark (55.9%), France (55.4%), Austria (55%) and Spain (54%) have the highest personal income tax rates among European OECD countries in 2021. For their part, Hungary (15%), Estonia (20%) and the Czech Republic (23%) maintain the lowest maximum personal income rates.