The global decline in top personal income tax rates appears to have come to an end, as governments worldwide look at boosting taxes on high earners to battle budget deficits, according to KPMG International’s recently released 2010 Individual Income Tax and Social Security Rate Report.
Confirming a trend first observed in 2009, the analysis shows that the steady global decline in top personal income tax rates is in the process of a turnaround as 2010’s average worldwide rate increased 0.3 percent. As many economies seek to recover from the downturn, finding the right balance between tax stimulus measures and tax rate increases has been a critical issue in 2010, according to the report. While tax rates remained static in most locations, the movements within the 2010 survey suggest that many governments have opted for a tax rate increase approach to combat deficit concerns.
“In the current economic environment, as many countries are faced with increasing budget deficits, they need funding for various economic stimulus packages,” said Ben Garfunkel, national partner in charge of KPMG’s International Executive Services practice. “Our study indicates that many of these countries are levying tax increases on their highest-earning taxpayers in order to increase revenue. We also see governments becoming increasingly sophisticated and rigorous in the framing and application of their tax rules,” Garfunkel stated in a news release.
The report’s findings are important for employers, as “personal tax rates can be a crucial deciding factor when evaluating where to locate workforces or the costs associated with international assignment programs,” Garfunkel stated.
Higher tax rates could lead to the emigration of highly skilled individuals, which could have detrimental effects on economic growth because of a subsequent decrease in tax revenues, a loss of skilled labor and disposable incomes, KPMG found. However, tax rates that are too generous will not provide governments with the revenues needed to maintain public services while closing budget deficits.
In the U.S., many Democrats, including President Barack Obama, favor allowing the top rate to rise to 39.6 percent in 2011 from the current 35 percent. Republicans and some Democrats disagree.
The majority of rate movement in 2010 comes from Europe, according to the report. The highest personal income taxes in the world are still paid by citizens of the European Union where average rates have increased by 0.4 percent since 2009.
The United Kingdom implemented a 10 percentage-point increase, raising its top rate from 40 percent in 2009-10 to 50 percent in 2010-11, the highest rate increase seen globally in 2010, according to KPMG.
Other Western European governments have followed suit in an attempt to increase tax revenues. Iceland, amid the collapse of its banking sector, replaced its flat tax regime with a progressive approach, raising the top personal income tax rate by approximately 9 percentage points.
Greece, in response to public deficit concerns, raised its top rate by 5 percentage points. Portugal and France raised top rates by 3 percentage points and 1 percentage point, respectively, to help address budget shortfalls. Ireland’s top rate increased by 1 percentage point in 2010.
Taking the opposite approach, Denmark opted for a stimulus package in hopes of increasing consumer spending and decreased its top rate by almost 7 percentage points. Croatia dropped its top rate by 5 percentage points.
After Europe, the next highest taxes are paid in the Asia-Pacific region. There was very little movement in 2010, but propelled by the 5 percentage-point drop in New Zealand and a 1 percentage-point drop in Malaysia, average top rates in Asia-Pacific declined by 0.4 percent in 2010. The most attractive rates for companies doing business in the region belong to Hong Kong and Singapore.
Personal income taxes continue to remain relatively low in Latin America; however, the region did not escape the upward rate development. A 2 percentage-point decline in Panama was offset by a 2 percentage-point increase in Mexico, but ultimately the 10 percentage-point increase in Jamaica pushed average top rates up by 0.8 percent in 2010.
Who Pays the Highest Taxes?
In terms of the highest income tax rate in the world, with the decrease in Danish rates, this spot is now held by the citizens of Sweden. The Swedes have a top personal income tax rate of nearly 57 percent. For the Asia-Pacific region, the top rate at 50 percent belongs to Japan. For Latin America, the top rate at 40 percent goes to Chile.
Striking the Right Balance
“Tax authorities are trying to strike the right balance as they face increasing pressure to identify and secure greater revenues, while also trying to attract businesses to set up operations in their country,” said Garfunkel.
“High-income earners typically have the talent and credentials to migrate to countries that have lower personal income tax rates and a need for skilled labor,” he added. “Attracting such individuals—including their tax revenues and disposable income—using a competitive personal tax rate, while also trying to address budget deficits, is a challenge, especially in the current economic environment,” he said.
Roy Maurer is a staff writer for SHRM.