Each year at about this time the OECD puts out a report on tax covering its member countries.

Each year some media and politicians can be counted on to misinterpret it.

The OECD report, Taxing Wages, estimates the so-called ‘tax wedge’ between total labour costs to the employer and the corresponding takehome pay to the worker at average earnings levels (and at certain fractions of the average wage). Social security tax payable by employers and employees, which is commonly used to fund welfare, is included.

Unlike most OECD countries, New Zealand funds most of its welfare spending from general tax revenues rather than from dedicated social security taxes levied on payrolls.

Thus Taxing Wages measures the difference between relatively broad measures of gross pay and net pay at the average wage. It finds that New Zealand’s tax wedge, at 18.4% for a single worker, is the second lowest in the OECD, above only Mexico.

This led Green Party co-leader Russell Norman, according to the New Zealand Herald, to claim that “the report showed the government wasmisleading people that New Zealand had high taxes, to justify tax cuts forthe highest earners.”

This is an extraordinary misinterpretation. The report shows nothing of the sort. It presents no measure of the overall tax burden or the distribution of tax.

Consider for a start the bottom two steps of the income tax scale that has applied from 1 October 2008: 0-$14,000 at 12.5% and $14,001 to $48,000 at 21%. The average wage used in the OECD analysis falls almost at the top of the second step. The average tax rate at $48,000 is 18.5%, close to the OECD’s measure.

All this tells us is that workers below the average wage pay only modest amounts of personal income tax.

We know this already from the annual budget tables. They tell us (2009 figures) that the 79% of taxpayers with taxable income of under $50,000 pay only 36% of total personal tax. The remaining 21% pay 64% of the total.

The fact that nearly four fifths of taxpayers are on taxable incomes of under $50,000 also tells us that New Zealand is not a high-income country.

The OECD report also finds that New Zealand had the smallest tax wedge for one-earner married couples with two children earning the average wage, at 0.6%.

However, it counts welfare payments such as Working for Families that are made through the tax system as negative tax. As Kiwiblogger David Farrar pointed out, this does not mean we have low levels of tax. It means we have high levels of welfare delivered through the tax system to families on the average wage who have children.

None of this tells us anything about the overall tax take, which includes not just personal tax but tax on companies, other incomes, GST, excise and other taxes.

The OECD reports separately the ratio of overall taxation to GDP. Its figure for the ratio of ‘general government total tax and non-tax receipts’ to GDP for New Zealand is 40% for 2010, well above the average OECD ratio of 36.6% and Australia’s ratio of 33.1%.

But even these figures understate true tax burdens. Nearly all OECD countries are running fiscal deficits – an excess of spending over revenue – amounting in some cases to more than 10% of GDP.

Borrowing to fund these deficits ultimately has to be repaid from taxation. Thus government spending at any point of time more accurately reflects the overall tax burden.

Total government spending in New Zealand currently amounts to a whopping 43% of GDP, according to the OECD.

On this basis Tax Freedom Day – the notional day in the year when the average New Zealander stops working for central and local government and starts working for themselves – won't arrive arrive for about another 3 weeks, on 8 June.

Moreover, for many purposes comparisons with OECD countries should be regarded as increasingly irrelevant for New Zealand. With huge fiscal burdens and major economic imbalances, many seem destined for a long period of economic stagnation.   More relevant benchmarks are a number of fast-growing Asian economies (such as Hong Kong, Singapore, Korea and Taiwan) with per capita incomes that have surpassed New Zealand levels or may soon do so.

These countries have levels of government spending and tax burdens that are well below New Zealand’s, as well as a number of superior social indicators such as high education standards and low welfare dependency.

So what is the bottom line on the OECD report? As David Farrar wrote, “Russell [Norman] is trying to mislead people, or doesn’t know what a tax wedge is.”  Yesterday’s budget presented updated projections for total central government spending and taxation. They are far above levels that would deliver fast growth and enable New Zealand to catch up to Australian income levels by 2025.