Personal Income Taxes Fall As Governments Compete For Talent

by Mike Godfrey, Tax-News.com, Washington

31 October 2008

Top personal income tax rates around the world have fallen by an average of 2.5% in the past six years, as governments strive to balance their need for revenue with the impact of increasing global labor mobility, a new study from KPMG International has found.

Worldwide, top personal tax rates have fallen from an average of 31.3% in 2003 to 28.8% in 2008. But European Union (EU) taxpayers still pay the highest rates, at an average of 36.4%, followed by taxpayers in the Asia Pacific countries with an average of 34.6% and those of Latin America at 26.9%, KPMG said.

At a country level, the highest tax rates in the world are paid by the people of Denmark, with a top rate of 59% for the whole six years, followed by those of Sweden, whose rate came down last year from 57% to 55%, and those of the Netherlands, who have paid 52% for the whole period.

Excluding those countries which levy no tax at all, the lowest EU rate is in Bulgaria, with a newly introduced flat rate of 10%, down from 24%. In Asia Pacific the lowest is in Hong Kong, with 16% and in Latin America it is in Paraguay with 10%.

Of the 87 countries surveyed, 33 have cut their rates in the past six years and only seven have a higher top rate in 2008 than they did in 2003.

Among the large western European economies, France has made the most significant cut in its rates, from 48.1% in 2003 to 40% in 2007. Germany has gone from 48.5% to 45%, having briefly stood at 42% in 2005 and 2006.

But across the EU it has been the introduction of flat rate taxes in the Eastern European states that has had the most impact, KPMG said. As well as Bulgaria’s new flat rate of 10%: Estonia has cut its rates from 26% in 2003 to a flat 21% in 2008; Slovakia has gone from 38% to a flat 19%; Lithuania last year fell 6 points to 27% and this year a further 3 points to a flat 24%; Romania has cut rates from 40% to a flat 16%; and the Czech Republic, this year, introduced a flat rate tax set at 15%.

In the Asia Pacific region, tax competition between Hong Kong and Singapore has led Singapore to cut its rate from 22% for 2003 to 21% in 2006 and 20% in 2007.

However, both the Hong Kong and Singapore governments offer their citizens tax rebates when public finances allow. For 2007/08, these rebates were 20% in Singapore, capped at SGD2,000 (USD1,400) and 75% in Hong Kong, capped at HKD25,000 (USD3,200).

“Australia also cut its personal tax rate by two points to 45% last year,” said Rosheen Garnon, head of KPMG’s International Executive Services practice and a partner in the Australian firm, “but if the intention was to attract back high value Australian workers who have temporarily moved to Hong Kong or Singapore, it may not be enough."

"It is common to hear from foreign workers that once families have become accustomed to the huge increase in spending and saving power that low tax rates provide, it can be very difficult to justify going home," Garnon added.

In Latin America, personal tax rates have generally stayed low but stable. There is an increase in the average, from 25.6% in 2003 to 26.9% in 2008, but this is entirely due to the introduction of a 10% income tax in Paraguay and a 25% tax in Uruguay, both effective from 2007.

Elsewhere in the region, tax movements have all been down, the survey found. Mexico and Panama stand out for their steady, year-on-year reductions. In the past six years, Panama has gone in stages from 33% to 22%, while Mexico has gone from 34% to 28%.

“Given that the share of national wealth taken by tax revenue in many countries is static, or has increased in the past five years, the fall in personal and corporate tax rates raises the question of how governments are now raising funds,” observed Garnon.

“We think the answer may lie in increases in indirect taxation, through value added taxes, goods and services taxes, customs duties and fees for specific services," she added.

“We do not foresee a time when personal income taxes will fall so far that they become irrelevant to people moving from country to country. But it is entirely possible that the relative level of indirect taxes will begin to play a much greater part in people’s decisions on where in the world to go for work," Garnon concluded.

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