A Simulation Method to Measure the Effective Tax Rate on Highly Skilled Labor

A model is presented for simulating the level of taxes imposed on highly skilled labor. The effective average tax rate, defined as the relative wedge between employment costs and disposable income, is computed. Income and payroll taxes and social security contributions not yielding an equivalent benefit are taken into account. The compensation package consists of cash payments and old-age provision. To integrate retirement benefits and their tax treatment, an intertemporal approach is used. The results indicate a wide dispersion of effective tax rates across Europe and the U.S. Slovakia, Switzerland and the U.S. tax highly skilled labor at a low rate. Scandinavian countries, Belgium, and Slovenia turn out to be high-tax countries.