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Personal income taxes on the world's highest earners have crept ever higher this year, rising by an average of 0.3%, according to a new report from KPMG.
This is only the third year in a decade that KPMG's analysis has turned up an average increase in the tax burden. Personal income taxes rose in 2010 as governments sought to consolidate their deficits, but the tax burden remained broadly level last year as policy makers in particular in Europe faced the prospect of a double-dip recession.
According to Brad Maxwell, a partner with KPMG's International Executive Services practice in Switzerland, the upward tick in personal tax rates during 2012 "is the result of a lack of economic recovery and increasing debt concerns".
“Many economies deemed it necessary to increase their highest rate of personal income tax through one of two approaches: either through the creation of new income tax rate bands for very high income earners, or through the introduction of temporary taxes to address immediate budgetary deficit concerns.” The most prominent examples of this pointed out in the survey are seen in the recent French and Spanish reforms, he said.
France’s reforms saw the introduction of two new tax rate bands for high income earners which has resulted in the top rate increasing from 41% to 45%. The rate increases are generally deemed as an ‘exceptional contribution’ which affects individuals reporting incomes of above EUR250,000 (USD324,000). Further increases may be on the horizon, with President Francois Hollande planning the introduction of a 75% tax rate band for taxpayers earning over EUR1m.
Meanwhile, Spain introduced its ‘complementary tax’ in January 2012 to help address its deficit. The tax applies to all taxpayers, and ranges from 0.75% to 7% depending on an individual’s income level. This effectively means that the rate of tax for individuals earning above EUR300,000 has risen from 45% to 52%. Spain has leaped in KPMG's rankings to having the third highest tax burden on earners, up from tenth last year.
The UK falls in the rankings as a result and is set to decline further from April next year, when the nation will reduce the highest income tax rate to 45% from 50%. This year, the UK has bucked the prevailing policy trend and moves from having the equal 4th highest rate to equal 5th (joint with Austria and Belgium). France is expected to leapfrog the United Kingdom in the rankings when the two countries' respective reforms enter into force, potentially next year.
At 45%, the UK will be closer to the EU average which, on a purely arithmetical basis, is just over 37% and, if weighted for the different size of populations in the various countries, is 42%, according to KPMG’s calculations and Eurostat data.
Marc Burrows, head of international executive services at KPMG in the UK, commented:
“The 50p rate was always described as temporary and so a firm commitment to its reduction was very welcome to businesses and entrepreneurs. Being ‘open for business’ is not just about the corporate tax regime. Personal tax is a major issue for entrepreneurs, high net worth individuals and senior executives, many of whom can and do exercise considerable discretion over where they choose to locate.”
“Headline top rates of tax don’t tell the whole story. The situation is more complicated than that. For example, in the UK, whilst the top rate of personal income tax is 50% on earnings of GBP150,000 (USD240,000) or more, some people on lower salaries experience a higher marginal tax rate in certain situations. Earnings between GBP100,000 and GBP116,210 are taxed at 60% as a result of the clawback of the personal allowance. From next January the withdrawal of child benefit for claimants with household incomes of GBP50,000 or more will result in marginal tax rates of over 50% on earnings between GBP50,000 and GBP60,000.
“Similarly, when comparing rates in different countries, it’s important to consider the threshold at which the rate kicks in and the effect of social security taxes which may be levied. Indeed the survey shows that when considering the combined effective social security and income tax rate levied on a salary of USD100,000 in a range of different countries, the UK is lower than countries such as Belgium, Italy, Germany and Poland.”
Western Europe continues to have the highest personal tax rates of any sub-region globally (46.1%). Sweden leads the rankings of advanced nations with a combined effective top rate of 56.6%, followed by Denmark (55.4%) and the Netherlands (52%). The average rate for Eastern Europe (16.7%) is still less than half of that of other European sub regions, largely due to the prevalence of low flat tax initiatives. Poland and the Ukraine are notable for being the only two Eastern European countries of those surveyed to maintain a progressive tax band structure.
The Middle East and greater Europe region has also seen some movement in tax rates over the past year. In October 2011 (shortly after the publication of last year’s survey), Cyprus increased its top marginal income tax rate from 30% to 35%, and applied the change retroactively from January 1, 2011. In 2012, Armenia also raised its tax rate by 5% and plans to introduce a further 1% increase in 2013. Israel also increased its top marginal tax rate (by 3% to 48%) and Georgia, which has not altered its top rate of tax for several years, signaled an intention to decrease its rate from 20% to 18% effective 2013.
Asia was largely quiet on the rate change front, South Korea introduced an additional tax band with a 3% increase in an effort to target high earners as a source of additional revenue. Hong Kong and Singapore continue to offer very attractive personal income tax rates, and rates remained constant in the other Asian heavyweights (China, Japan and India) who have not altered their top rate of tax in the last ten years. However, there are indications that this trend is set to change with permanent residents of Japan soon becoming subject to a Special Reconstruction Surtax which will start next year with the intention of helping fund the rebuild in the aftermath of the Great East Japan Earthquake.
Some change has been noted in Africa with Egypt introducing a new 25% tax band to target super high income earners, and Zimbabwe increasing its top tax rate by over 10% (bringing it back in line with 2008 levels).
Top rates across North America remained relatively unchanged throughout the year, though Canada’s most populated province Ontario recently announced a hike for high income earners which will increase the top combined federal and provincial rate by 1.56%, putting the jurisdiction onto the list of locations that introduced an additional tax band for its highest earners in 2012.
Meanwhile, while there were no changes to top federal rates in the United States in 2012, the Bush Tax Cuts are once again scheduled to expire at year’s end meaning that, if the expiration remains on schedule, the top US federal tax rate would increase from 35% to 39.6% in 2013.
Overall, Latin America has also kept top rates constant during 2012, though KPMG noted that Mexico is scheduled to decrease its top rate from 30% to 29% next year, and a further reduction to 28% is scheduled for 2014. Guatemala is also scheduled to decrease its top rate in 2013.
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