Cost of labour: 2018 tax wedge decrease in Estonia biggest in OECD

Employees at an Arcwood (Peetri Puit) factory in Põlva.
Employees at an Arcwood (Peetri Puit) factory in Põlva. Source: Jaanus Lensment/Postimees/Scanpix

The share of taxes in labour costs in Estonia decreased by 2.54 percentage points in 2018. This the biggest decline reported by any member of the Organisation for Economic Cooperation and Development (OECD).

The decline in what is also called the tax wedge, namely total taxes on labour costs paid by employees as well as employers, was driven by the income tax reform under Prime Minister Jüri Ratas (Centre).

"The main objective of the new basic exemption system was to increase the income of the people receiving low to medium wages. This also brings about an decrease in the tax wedge, as is shown in the OECD report," undersecretary for tax and customs policy at the Ministry of Finance, Dmitri Jegorov, said in a press release earlier this week.

The Ministry of Finance also said that the decline in the tax wedge is important, as an excessively high tax wedge may discourage employment and negatively affect the development of the labour market.

The average tax wedge among OECD member countries was 36.1% in 2018. This represents a decrease of 0.16 percentage points compared with 2017. The change was caused by substantial drops reported by four countries: Estonia, the United States, Hungary and Belgium.

In 2018, a new basic exemption of up to €6,000 per year entered into force, the amount of which depends on the sum total of a person's wages and other revenues.

The tax wedge is defined as the ratio between the amount of taxes paid by an average single worker (a single person at 100% of average earnings) without children on one hand, and the corresponding total labour cost to the employer on the other. The average tax wedge measures the extent to which taxes on labour income discourages employment.

Editor: Dario Cavegn

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