Thursday, May 2, 2013

Implicit Tax Rate on Labour

Much of the recent emphasis has been on the corporate income tax, but the Eurostat Tax Statistics Annual provides insight on all taxes.  Here are Eurostat’s implicit tax rates on labour for each of the 27 member states in 2011.


Ireland is right down towards the bottom with the main reason for the difference being the lower rates of social insurance contributions and, in particular, employer social insurance contributions.   The chart offers nothing on the pattern of the implicit tax rate on labour at different wage levels.  Ireland has a very progressive system of Income Tax with low rates (in relative EU terms) on low/middle incomes and average rates and possibly even above average rates (in relative EU terms) on high incomes.  Ireland has low social insurance contributions, employee and especially employer, at all income levels.

The implicit tax rate on labour is explained on page 284 and is summarised in the following box and definition:

Implicit Tax Rate on Labour

The ITR on employed labour is defined as the sum of all direct and indirect taxes and employees' and employers' social contributions levied on employed labour income divided by the total compensation of employees working in the economic territory (see Box F.2).

The ITR on labour is calculated for employed labour only (so excluding the tax burden falling on social transfers, including pensions). Direct taxes are defined as the revenue from personal income tax that can be allocated to labour income. Indirect taxes on labour income, currently applied in some Member States, are taxes such as payroll taxes paid by the employer.

The compensation of employees is defined as total remuneration, in cash or in kind, payable by an employer to an employee in return for work done. It consists of gross wages (in cash or in kind) and thus also the amount paid as social insurance contributions and wage withholding tax. In addition, employers' contributions to social security (including imputed social contributions) as well as to private pensions and related schemes are included. Personal income taxes and social security contributions paid by EU civil servants to the EU Institutions are excluded. Compensation of employees is thus a broad measure of the gross economic income from employment before any charges are withheld.


  1. In a country with a high proportion of private pensions, employer/employee contribution is treated as income. In a country with a high proportion of state pension, it is treated as a tax.

    Do I understand that right?

    If so, it seems to make the comparisons laughable.

    1. Hi yoganmahew,

      Yes, private pension contributions are just recorded as income. Social insurance contributions are recorded as income initially and the subsequently taken as a deduction. I might try and track down some figures on private pension contributions (social insurance contributions paid to the financial sector) from Eurostat's Institutional Sector Accounts.

      For 2011 in Ireland private contributions are around €4.2 billion (employee and employer contributions) compares to €10.3 billion for contributions paid to the government sector (PRSI and Public Sector Pension Contributions).

      See table here with social contributions paid broken down by sector.

    2. Thank you!