“Reducing the tax wedge”. “Lower the wedge”. “Cut the wedge”. But what is the so-called tax wedge that constantly fills the speeches and programs of Italian politicians? Simply put, it’s the cost of labor, but in reality it is more complex. And its reduction, in fact, seems in many ways essential to make businesses more competitive and give workers greater purchasing power.
Let's start with the definitions. The tax wedge is the sum of taxes (direct, indirect or in the form of social security contributions) that weigh on the cost of labor, both relating to employers, and the income of workers, employees and the self-employed. Or to say it in an even simpler way: it’s the difference between how much an employee costs to the company that hires him and how much the same employee collects, net of taxes, in his paycheck.
In Italy, this difference is very high. According to Taxing Wages, the yearly report comparing taxes charged to employers and workers in 35 OECD countries Italy is in third place with 47.9%, followed quickly by France (47.6%). Only Belgium (52.7%) and Germany (49.5%) fare worse than us. But while for France, Germany and Belgium the value of the tax wedge is decreasing, for Italy it has grown: it was 45.9% in 2005.
According to Taxing Wages, the yearly report that compares taxes for businesses and workers in 35 OECD countries, Italy ranks third with 47.9%
The latest Istat report “Condizioni di vita, reddito e carico fiscale delle famiglie”, published in December 2018 and referring to 2016, considers this from the perspective of Italians and their pockets. The cost of labor in Italy, explains Istat, reaches the average value of 32,154 euros. The net pay that is available to the worker is just over half of the total labor cost (54.3% equals to € 17,447).
The tax and social security wedge is higher with increasing age and educational qualifications, which allows access to better paid jobs. In fact, it reaches the maximum value of 54% of the labor costs for managers, while it is 44.5% for workers. Furthermore, it is much higher for those with a permanent employment contract (46.6% compared to 41.7% of those on a temporary contract) and a full-time working contract (46.3% compared to 38, 8% of those working less than 30 hours per week). It stands at 46% for Italian citizens against 41.9% of those who do not have Italian citizenship. On a territorial level, the wedge is higher in the North-west (46.8%) and in the Center (46.2%), and lower (43.6%) in the South and in the Islands, where incomes are, on average, lower. There are also gender differences, probably linked to the gender pay gap: for women, the wedge is 44% on average, for men 46.8%.