Tax wedge on labour in the European Union comparative analysis

The tax wedge is the difference between what employees take home in earnings (net wages) and the costs of employing them (gross wages including personal income tax and employee social security contributions) together with employer social security contributions plus any payroll tax.

The objective of this paper is to present and assess the changes in the size and the structure of the tax wedge in the European Union countries.

The analysis is based mainly on Eurostat and OECD official statistical databases. The data for the years 2000-2012 are analysed in different cross sections: EU-27, EU-15 (“old” EU countries) and EU-12 (“new” EU countries), with the emphasis on Poland.

For many years tax wedges on labour have been falling in many European Union countries. The current financial and economic crisis affected taxation of labour, consumption and capital leading to an inhibition of long-term trends. Statistical data show that at the time of crisis tax burdens are shifting for taxation of capital to taxation of labour.

This paper is focused on analysis of the impact of changes in tax systems in EU countries. Personal income tax, social security contribution imposed on employees and employers, and other taxes on labour are taken into consideration in this paper. This article presents the changes implemented in taxation of labour and their effects on labour market (employment and unemployment rates) and on the whole economy (economic growth, competitiveness, foreign direct investments, diversification of income).

The recommendations for the economic policy pursued in Poland are presented in the last part of the paper. A reduction of the tax wedge of low-earning employees and those burdened with children should be considered.