Tax wedge rises in Ireland but still far below the OECD average

The tax wedge in Ireland remained one of the lowest in the OECD in 2009 with 24 countries out of 30 taking a higher percentage from single people on the average wage and 27 countries taking more from a family on an average wage according to the OECD’s annual publication ‘Taxing Wages’ published on May 11, 2010. This is the case despite the fact that Ireland increased the tax wedge in 2009 on single people with average wages by 1.5 percentage points and on families with average wages (two adults, one-earner, with two children) by two percentage points.

In these calculations the tax wedge is made up of income tax plus employee and employer social insurance contributions minus cash transfers. However, it does not include the impact of wage cuts in any of these countries.

Average tax and social insurance paid on employment incomes fell slightly in 24 out of 30 OECD countries in 2009 as governments struggled to shore up faltering economies amid the worst recession in decades. But whether this trend will continue in 2010 is uncertain according to the OECD given the widespread pressures on government budgets.

Taxes on wages, including both employer and employee social security contributions, are a key factor in companies’ hiring decisions and individuals’ attitudes to work. As such, they indirectly affect employment trends.