UK Leads EU Tax Rate Hikes

by Jason Gorringe, Tax-News.com, London

12 October 2010

New research from KPMG has shown that workers in the United Kingdom are suffering more than most as a result of post-crisis tax policy, with the UK’s personal income tax rates now the fourth most punitive in Europe, up from thirteenth a year prior.

Last year's increase in Britain's top rate of personal income tax to 50% was the highest seen globally and has propelled the UK to 4th position in a league table of EU personal tax rates, in KPMG's individual income tax and social security rate survey 2010.

The KPMG findings show an upward trend across Europe, and also other advanced economies, where governments are seeking increased revenues from their country’s highest earners.

According to KPMG, “while across the world taxes remained static in many locations, the general upward trend suggests governments are beginning to opt for a tax rate increase in some instances to combat deficit concerns.”

Jayne Vaughan, tax partner in International Executive Services at KPMG in the UK commented:

"With our top rate at 50%, only Sweden, the Netherlands and Denmark outstrip us, the UK, in terms of personal income tax rates, we are lagging behind our key competitors, France and Germany. It is however worth noting that the UK top rate of tax kicks in at a much higher earnings level than is the case in most of these countries.”

“[The presence of high personal income tax rates in the UK] makes a big difference to our competitiveness as individuals are highly mobile and they may decide to vote with their feet. Where employers are concerned, tax is a crucial business issue when it comes to deciding where to locate workforces.”

"Whether the tax rate increases we have seen around the world strike the right balance and have the intended impact has yet to be seen. Everyone may have a role to play in supporting their national deficit reduction measures but the fact that high-income earners are frequently more mobile should not be overlooked.”

Concluding, Vaughan said governments are therefore faced with a challenge in that to attract such individuals, governments are required to ensure that their personal tax rate regime remains competitive whilst tackling their individual budget deficits.

The survey shows that the majority of rate movement in 2010 comes from Europe. The highest personal income taxes in the world are still paid by citizens of the EU where average rates went up by 0.3% over the past year.

In Western Europe, the upward trend initiated by Ireland last year has spread as anticipated. While the top Irish rate went up by 1% in 2010, the UK dominated headlines with a 10% increase raising its top rate from 40% in 2009/10 to 50% in 2010/11 - the highest rate increase seen globally this year (the 40% rate remains in place on incomes between GBP37,401 and GBP150,000).

Other Western European governments have followed suit in an attempt to increase tax revenues. Iceland, amid the collapse of the banking sector, replaced its flat tax regime with a progressive approach raising the top personal income tax rate by approximately 9%. Greece, in response to public deficit concerns, raised its top rate by 5%. Portugal, and most recently France raised top rates by 3% and 1% respectively to help address budget shortfalls. Even the Isle of Man, with a long standing top rate of 18%, saw a 2% increase to 20% in 2010/11.

At the opposite end of the spectrum, Denmark opted for a stimulus package in hopes of increasing consumer spending and as a result, decreased its top rate by almost 7%. Croatia, this past July, also dropped its top rate by 5%.

The low flat tax initiatives of Eastern European governments which fueled the historic downward trend have stagnated. Estonia which first created a flat tax in 1994 and intended to reduce the rate down to 18% by 2012, has since abolished this plan. Latvia meanwhile increased rates, hiking its flat tax to 23% in 2009, and to 26% in 2010.

After the Europeans, the next highest taxes are paid by the people of the Asia-Pacific region but the margin continues to spread. There was very little movement in 2010, but propelled by the 5% drop in New Zealand and a 1% drop in Malaysia, average top rates in Asia-Pacific declined by 0.4% in 2010. The rate competition in this region continues to be led by Hong Kong and Singapore.

Turning to Latin America, personal income taxes continue to remain relatively low; however, the region did not escape the upward rate development. A 2% decline in Panama was offset by a 2% increase in Mexico, but ultimately the 10% increase in Jamaica pushed average top rates up by 0.8% in 2010.

In terms of the highest income tax rates in the world, with the decrease in Danish rates, this spot is now held by the people of Sweden. The Swedes have a top personal income tax rate of over 56% in 2010. For the Asia-Pacific region, the top rate, at 50%, belongs to Japan. For Latin America, the top rate, at 40%, is that of Chile.

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