The Biden administration has laid out significant plans to change tax policy, including changes that would affect workers. While the administration is primarily concerned with increasing the top individual income tax rate to 39.6% on income above $400,000 for individual filers and $450,000 for joint filers, as well as providing tax relief for families, it is useful to understand what the existing tax burden is like. for workers
Workers in the United States generally face two main income taxes: individual income tax and payroll tax (which is levied on both the employee and the employer). Slightly more than half of the payroll tax burden is paid by employers, but workers ultimately bear this burden through lower take-home pay.
In 2022, the Organization for Economic Co-operation and Development (OECD) reported that the overall tax burden of an average single worker in the US. tax wedge. This is 4 percentage points lower than the average labor tax burden for single workers across OECD countries.
The worker’s tax burden includes the income tax share of 15.9 percent of pre-tax income, employee payroll taxes of 7.1 percent, and employer payroll taxes of 7. .5 percent. Payroll taxes fund federal programs like Social Security, Medicare, and Unemployment Insurance (UI).
The labor income tax wedge is the difference between the employer’s total labor costs and the employee’s net take-home pay. To calculate a country’s tax wedge, the OECD adds the income tax payment, the payroll tax payment of employees, and the payroll tax payment on the employer’s side of a worker earning the average wage. from the country. The OECD divides this amount by the total labor cost of this average worker, or what the worker would have earned in the absence of these three taxes. The economic literature finds a negative relationship between a country’s tax wedge and the employment rate; as the first increases, the second decreases.
Personal income taxes in the US are progressive. This means that as people earn more, they pay more income tax. Currently, the seven income tax brackets range from 10 to 37 percent.
However, several provisions of the tax code provide tax reductions for workers, including benefits for families with children and work incentives. While the tax burden was 30.5 percent for a single worker earning the median wage in 2022, that burden was only 19.8 percent for a single-earner family with two children.
The US tax burden on single workers earning the median wage has consistently remained below the OECD average, with the gap widening slightly in the years following the Tax Cuts and Jobs Act (TCJA). ) from 2017. That difference was larger in 2020 when the U.S. tax burden on workers earning the median wage dropped to 27.2 percent, before rebounding in 2022.
The 2020 trough was partly the result of Economic Impact Payments that provided direct relief to millions of taxpayers in the United States. There were two rounds of these payments in 2020 and a third round in 2021. Overall, $867 billion in direct payments were provided to taxpayers.
Although the US has a progressive tax system and a relatively low tax burden compared to the OECD average, workers with average wages still pay more than 30 percent of their wages in taxes.
To make taxation of labor more efficient, lawmakers in the US and abroad need to understand how the tax wedge is generated, and taxpayers need to understand how their tax burden funds government services. This will be particularly important as policymakers explore ways to foster a strong economic recovery.