Tax wedge is an indicator of the tax burden that can be calculated for different types of taxes. In practice, the tax wedge is most often used to estimate the tax burden on the labour market and is calculated as a percentage of the total tax burden and total labour cost. The tax burden consists of employers’ and employees’ social insurance contributions and personal income taxes. The total cost of labour includes taxable and non-taxable wage, as well as employers’ contributions. The tax wedge is generally calculated for the so-called "hypothetical individuals and families" (for example, for a single person with an average gross salary). Such an analysis is useful for monitoring the effects of tax reform and for cross-country comparisons but provides only a simplified picture of actual developments in the tax system.
The aim of this research was to develop a methodology for calculating the tax wedge based on data on taxpayers in the Republic of Croatia who earn income from employment. The project study contains a detailed description of the methodology of calculating the tax wedge (i.e., the “methodological manual”) and a report on the tax wedge calculated for the period 2014-18.
This research represents a step forward in terms of a pioneering analysis of the tax wedge in Croatia based on actual administrative data of the Tax Administration. The analysis covered almost all employees and all compulsory payments that had been in force in the period 2014-18. This period has been marked by major changes in the tax system, and tax wedge calculations were to show the real picture of how these changes affected the tax burden.