Definition: Taxes on labour

Category: National accounts

Taxes on labour ("non-wage labour costs") are taxes and contributions which are levied on earnings from labour or which have to be paid due to the fact that labour is employed. It is assumed that these taxes discriminate, in one way or another, against the use of the labour factor, at least in the official ("white") area of the economy. The concept of taxes on labour as used here is thus comparatively broad. The Structures distinguish between employed and self-employed labour. The first category is divided into taxes on employed labour paid by employers (e.g. employers' social security contributions and payroll taxes), and taxes on employed labour paid by employees' (e.g. employees' social security contributions and wages taxes). The category taxes on self-employed labour mainly comprise the social contributions paid by self-employed persons and income taxes. The main part of taxes on labour is composed of (compulsory) social contributions. These contributions differ from taxes inasmuch as they create a right to certain forms of social protection which is above the level that the State offers to its citizens in general or to certain groups as a compensation for specific burdens borne by them (e.g. for war victims). Moreover, the amount of protection is positively related to the amount of the contributions paid. For these reasons one might argue that social contributions are not taxes but have more the characteristics of savings, insurance premiums or fees. Nevertheless, the Structures follow the common definition and classify social contributions along with taxes. This decision seems justified by the fact that the link between individually received protection and individually paid contributions is quite loose compared to the link between premiums and protection in insurance bought in a market. Moreover there is usually a strong distributive element in the social security system and the possibilities of choice regarding payment and received benefits are quite restricted.