Paying a worker their salary entails payment of various mandatory levies, which reduce the worker’s net salary while increasing the employer’s overall cost. The tax wedge is the most popular indicator for measuring the tax burden on labour income, and is calculated as a percentage share of the total tax burden in the total cost of labour.
In the new IPF Note Ivica Urban reveals that a systematic reduction of the tax burden on labour income in the period between 2014 and 2021 led to a drop in the average tax wedge by 4.2 percentage points. The analysis by age group shows that persons under the age of 30 experienced a larger reduction of the average tax wedge than the other age groups, primarily due to the introduction of reliefs for young workers in the systems of social insurance contributions and personal income tax.
A reasonable question to ask is what causes these tax wedge differences between various age groups. To answer this question, Urban has analysed the structure of the average tax wedge according to three types of mandatory levies (employer social insurance contributions, employee social insurance contributions and personal income tax and surtax) and three age groups (41-50, 26-30 and 18-25). The largest share of the tax burden in the entire period is taken up by employee social insurance contributions, i.e., pension insurance contributions. The share of employer social insurance contributions gradually decreased during the analysed period and fell by two percentage points in total. When compared to the social insurance contributions, the share of personal income tax and surtax in the tax wedge seems quite modest, undergoing reductions in the 2014-2021 period from 4.0 to 2.6 percentage points.