Addressing government budgetary deficit concerns, many countries around the world continue to either create new income tax rate bands for very high income tax earners or are introducing new temporary taxes. According to KPMG International, the global average income tax rate increased again this year by 0.3 percent – the second year in a row. 2013 also saw the second highest number of rate increases (9 countries) since KPMG began collecting rate data in 2003.
The most highly publicized tax rate change for 2013 occurred in the US, where the expiration of Bush administration era tax cuts saw the highest federal rate increase from 35 percent to 39.6 percent. Slovenia saw the greatest increase, with its top rate moving up 9 percentage points from 41 percent to 50 percent, shows “Tax rates online”, KPMG International’s tax tool.
“Targeting high income earners is a way for governments to gain revenue and be seen by taxpayers as doing something that is fair and necessary for the betterment of their country,” says René Philips, KPMG’s Global Head of International Executive Services.
India is one example to note with its introduction of a new temporary tax on high earners. For the 2013/14 fiscal year only, India has imposed a 10 percent surcharge on tax paid by individuals earning over INR10million. Similarly, the Czech Republic has put in place a temporary tax, referred to as a ‘solidarity surcharge’ and applied at a rate of 7 percent to income exceeding CZK1,242,432.
In addition, Japan increased its highest rate by 0.84 percent due to the introduction of a ‘Special Reconstruction Surtax’ which the Japanese government introduced to help fund the cost of rebuilding after the Great East Japan Earthquake of 2011.
Latvia decreased its flat tax rate by 1 percent as part of a staggered move to reduce its rate from 25 percent to 20 percent by 2015, and Greece decreased its top rate by 3 percent (from 45 percent to 42 percent). While the top rate did decrease in Greece, the change was part of a wider move to restructure all tax rate bands. These changes saw tax rates increase at the lower and middle levels, to the extent that tax rates actually increased for all individuals earning under EUR 220,000 (despite the decrease in the top rate).
The third and most notable decrease occurred in the UK, where the top rate was reduced from 50 percent to 45 percent effective 6 April 2013. During its 3 years of operation, the UK’s 50 percent rate was widely criticized for driving high-earning individuals abroad and acting as a deterrent to entrepreneurship.
Similar criticism has been applied to the highly-publicized 75 percent tax bracket (on individuals earning over EUR 1 million per year) proposed by French President, François, Hollande, over a year ago. In December 2012, France’s constitutional council ruled that the 75 percent rate was unconstitutional, and it is still unclear whether a tax on the “super rich” will be introduced in France in a different form.
As Madalina Racovitan, Partner and Head of People Services at KPMG in Romania comments: “The French have traditionally been tolerant of high taxes and social contributions as the price to pay for good public services and social benefits. Moreover, public opinion has generally been disapproving towards wealthy individuals who have left France to escape the proposed 75% tax. However, it appears that a growing number of French citizens are concerned at the high level of taxes, particularly as the quality of public services appears to be in decline. It will be interesting to see how the issue of tax is treated in the forthcoming local and European election campaigns.”
As Racovitan continues: “Turning to Romania, there has been no change to the 16% flat rate of personal income tax introduced at the start of 2005. The rate appears to be competitive, but to understand the true costs of employment, social contributions also need to be taken into account. These are quite high in Romania, as KPMG global comparative studies have revealed, and, moreover, the benefits they deliver are low. The cap on social contributions at 5 times the average salary is a positive feature, although has limited application. The government should carefully consider reducing social contributions or at least capping them at reasonable levels, to encourage employment and stimulate economic growth. The Government has publicly stated this year that a reduction in social contributions is being carefully considered for next year. However it remains to be seen what the actual measures will be.“
For more details, please access “Tax rates online”, KPMG International’s tax tool.
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