Why tax wedge matters to a first-time founder
The wedge explains why hiring costs more than the salary an employee receives. It helps founders compare employment budgets across locations and communicate compensation clearly. Employer contributions, employee contributions and income tax can each change the gap.
Examples of tax wedge
An employer spends ¥6 million on salary and compulsory employer contributions, while the employee receives ¥4.2 million after employee contributions and income tax. The ¥1.8 million gap is the tax wedge in this simplified example. Standard comparisons may express it as a percentage of labour cost.
Common misunderstanding
The tax wedge is not one tax rate and does not equal the employee’s income tax alone. Its precise components vary between studies and jurisdictions. Benefits, household type and income level may also change a published comparison, so definitions must be checked.
When to use it
Use it when comparing total employment cost with take-home pay or analysing labour-market incentives. State the jurisdiction, worker profile, period, included charges and denominator. For an actual hire, calculate payroll using current local rules rather than a general comparative figure.