Fiscal Drag Blunting Impact of Tax Rate Cuts
More evidence has emerged that tax rate reductions don’t always result in a much lower tax burden for individuals.
“On average across OECD countries,” according to a new report, “the share of taxes and social security payments as a proportion of total labour costs fell slightly at most earnings levels between 2000 and 2006.”
Fiscal drag had a significant impact on the tax liability of many citizens, however. “During the period under review, while many countries cut headline tax rates or introduced more generous tax concessions, such moves often failed to reduce individual earners’ tax bills in any significant way. The fiscal drag effect was especially strong in countries whose tax rates rose sharply as earnings increased or where earnings growth was above-average.”
…wage-earners in some countries still found themselves paying the same or more in taxes, as pay increases pushed them into new tax brackets where higher rates are charged or because tax reliefs, such as those related to children, have eroded in value.
Another finding of the study, “In many OECD countries, average full-time earnings rose considerably between 2000 and 2006, the most recent year for which comparative figures are available, with nine countries – the Czech Republic, Greece, Hungary, Iceland, Korea, Mexico, Portugal, the Slovak Republic and Turkey – showing nominal increases of more than 40%.”
Generally speaking, changes in tax codes have favored the working class during the 2000-06 period. “But in a few countries – Australia, Canada, Germany, Iceland, Korea, Luxembourg, Norway and the United States – tax reforms have mainly benefited higher-income groups.”
In the U.S., taxpayers in higher income brackets saw their tax burden drop by around 1.6 percentage points, those on average or below-average earnings saw little change.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
