Tax Burden Indicators for Labour (Taxing Wages model) and for Capital ( METR/AETR model ):

1. Tax Burden Indicatorsfor Labour (Taxing Wages model)and for Capital (METR/AETR model): W. Steven Clark OECD Centre for Tax Policy and Administration LAC Tax Policy Forum 16-17 September 2010, Panama City

2. Backward-looking versusparameter-based tax burden indicators • Policy interest in various measures of the tax burden on labour and capital (‘tax burden indicators’). • Backward-looking indicators: derived using data on taxes paid, as a percentage of pre-tax income (at the taxpayer or aggregate level). • Parameter-based (forward-looking) indicators: derived from tax calculations for representative taxpayers, based on tax legislation (statutory tax rates, base provisions). • Taxing Wages framework (OECD) – used to assess marginal and average tax rates on labour income, and tax policy issues • METR/AETR framework – used to assess marginal and average tax rates on capital income, and tax policy issues. Recent OECD work highlights need to account for corporate tax planning.

3. Part I - Taxing Wages framework • Taxing Wages framework - used by OECD countries to: • Derive internationally comparable average and marginal tax rates on labour income, for different wage levels and household types • Measure tax rates at various multiples of the average wage (AW) • Measure tax rates for single/married individuals, with/without children • Compare the composition of tax rates on labour income (tax mix): • Progressive personal income tax (PIT) • Regressive social security contributions (SSC) • Measure impact on tax rates of family benefits, in-work tax credits, benefit abatement (reduction in benefits as income increases) • Measure overall progressivity of tax burden on labour income • Assess possible tax effects on decision to enter the labour market (primary and secondary earners), decisions on work effort.

4. Gross and net income measures Total labour costs - employer social security contributions Gross earnings - employee social security contributions - personal income tax + cash benefits Net earnings

5. Average tax rate measures personal income tax (PIT) Average income tax = gross earnings PIT + employee SSC – cash transfers Average income tax plus = employee SSC – cash transfers gross earnings gross earnings – net earnings = gross earnings

6. PIT + employee SSC – cash benefits + employer SSC Average tax wedge = gross earnings + employer SSC total labour costs – net earnings = total labour costs

7. Marginal tax rate measures ∆ (PIT + employee SSC – cash transfers) Marginal rate (income tax plus = employee SSC – cash transfers)∆ (gross earnings) ∆ (PIT + employee SSC – cash transfers + employer SSC) Marginal tax wedge = ∆ (gross earnings) + ∆ (employer SSC ) ∆ (gross earnings) = +1 currency unit

8. Consideration of different multiples of gross wage earnings (AW) and family types: • Single 67% of AW 0 children • Single 100% of AW 0 children • Single 167% of AW 0 children • Single 67% of AW 2 children • Married 100% - 0% of AW 2 children • Married 100% - 33% of AW 2 children • Married 100% - 67% of AW 2 children • Married 100% - 33% of AW 0 children

9. Comparison of average tax wedge and components, 2007 (single, no children, 100% of AW)

10. Average tax wedge components:Czech Republic (single, no children, 2008)

11. Average tax wedge components:Czech Republic (married, two children, 2008)

12. Marginal tax wedge components:Czech Republic (married, two children, 2008)

13. Comparison of PIT progressivity ((PIT(167)-PIT(67))/PIT(167))*100

14. Comparison of PIT+SSC progressivity ((TW167-TW67)/TW167)*100

15. Extension of Taxing Wages modelto include benefit programs • Extension of TW model includes other benefit programs: • Unemployment insurance/assistance • Social assistance • Housing benefits • Family benefits • Lone-parent benefits • Employment-conditional benefits • Enables calculation of net replacement rates (NRR): • NRR= net income while out of work / net income while in work • Proportion of in-work income maintained when unemployed. • Enables assessment of ‘unemployment traps’ and also ‘inactivity traps’ (ATR)

16. Part II – METR/AETR framework • METR/AETR framework - used by OECD countries to: • Derive internationally comparable marginal and average tax rates on capital income for different assets, industries, sources of finance • Measure tax distortions to investment and the allocation of capital across assets (machinery, buildings, land) and locations • Domestic and cross-border METR/AETR measures • Separately identify and assess the impact on the effective tax rate on investment of key tax parameters influencing after-tax profits: • Statutory corporate income tax rates • Tax depreciation methods and rates • Investment tax credits/allowances/incentives • Capital taxes • Sales taxes on capital goods • Interest deductibility, shareholder taxes (dividends, capital gains)

17. Applications of METR/AETR framework • Assess contribution of different CIT parameters (e.g. basic statutory tax rate, tax depreciation rates) to economy-wide and sectoral METR/AETRs. • Identify unintended tax distortions to allocation of capital – underpins analysis of base broadening options. • Assess intended tax distortions to the level and allocation of capital, resulting from tax incentives for investment. • Assess change in the tax burden on investment (ΔETR ) resulting from corporate tax reform. • Assess impact on investment of corporate tax reform, using estimates of the sensitivity (tax elasticity) of investment to METR/AETR.

18. Example: METR application in Canada

19. Applications in LAC countries • Taxing Wages framework may be usefully applied to compare across LAC (and OECD) countries taxes paid on labour income (tax mix, average, marginal tax rates), to address labour taxation issues. • Information gathered for LAC Revenue Statistics can be used to inform Taxing Wages modelling (e.g. treatment of social security contributions). • METR/AETR framework may be applied to compare across LAC countries taxation of capital income, to address tax distortions to investment and effects of tax planning. • Use of common/agreed measures enables meaningful tax burden comparisons to inform policy analysis/discussions.

20. Thank you