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Personal Tax Review

By Editorial
October 9, 2013

For many years, studies showed that personal income taxes were falling, especially for high-earners, as indirect taxes took more of many countries’ overall tax burden. As the financial crisis hit national budgets, this trend was broken as governments sought to raise additional revenue from the wealthy in particular, and top rates began to creep up once more. In the post-crisis landscape, the picture is a mixed one, and while some governments are attempting to ease the individual tax burden to encourage consumption and investment, others are continuing to insist that those with the broadest shoulders bear the greatest burden. As our recent news output shows, this is often dependent on the political persuasion of the government in power.


Perhaps sensing the futility in their demands, Germany's main Opposition parties, the centre-left Social Democrats (SPD) and the Green Party, have moved away from their ultimatum that tax rises must be included in any future coalition agreement with German Chancellor Angela Merkel and her centre-right Christian Democratic Union (CDU) party, which was re-elected in September 2013.

While insisting that tax rises must not be an end in themselves, SPD Chairman Sigmar Gabriel nevertheless warned that the CDU must put forward alternative proposals to secure financing for future investment in education, infrastructure, and towns and communes in Germany, without recourse to greater debt.

As part of their election manifesto, the SPD proposed increasing the top rate of income tax to 49% from the current 41%. The party also called for the introduction of a wealth tax based on property over a certain value.

These latest concessions will come as a relief to Chancellor Merkel as the coalition negotiations continue, especially given the tough stance adopted by her own party. German Finance Minister Wolfgang Schäuble (CDU) has steadfastly maintained his opposition to the idea of tax rises, pointing out that the state must make do with the money it has. Indeed, ahead of the elections, Schäuble pledged to re-submit to lawmakers measures aimed at further alleviating the effects of “fiscal drift” (when tax brackets fail to keep pace with wage inflation) in the income tax system, beyond the measures agreed by the Bundesrat, or upper house of parliament, at the end of last year. Bavaria's Prime Minister and leader of the CDU's sister party, the Christian Social Union (CSU), Horst Seehofer also recently reiterated his pledge that there will not be tax rises with his party.

Indeed, Germany’s overall tax burden is already considered high, and even the European Commission has reportedly urged a reduction in tax contribution by individuals, notably by the country's most modest earners.

According to Focus, the outgoing black-yellow coalition Government has recently submitted to the German Bundestag, or lower house of parliament, the European Commission's latest "Europe 2020 Strategy" report. In its report, the European Commission underlined the need for Germany to maintain wage growth to support domestic demand.

To achieve this objective, the Commission advocated that the incoming Government reduce the high tax burden weighing heavily on low-income earners in particular. Furthermore, the Commission recommended raising education levels for the most disadvantaged.

While praising Germany for the "significant progress" made in redressing the public finances, the European Commission nevertheless insisted that reform efforts have been "insufficient" up to now. Fiscal incentives encouraging low-paid workers and dual-income households to work must be improved, the Commission made clear.


The French Government also plans to alleviate the tax burden on low and middle incomes by adjusting tax brackets in line with inflation in its 2014 Budget proposal, presented in September 2013, following a two-year consecutive freeze implemented by the previous Government. Furthermore, the tax discount mechanism (décote) is to rise by 5 percent to EUR508. At a cost of around EUR900m, the measures are expected to benefit in the region of seven million households in France, of which 200,000, currently subject to taxation, will not be taxed in 2014.

However, while the Government is prepared to give with one hand, it will snatch back with the other. As part of efforts to consolidate and to modernize the country's social model, the Government plans to reform its family and retirement policies. Consequently, the "family quotient" income tax break ceiling will be further lowered from EUR2,000 to EUR1,500 next year, affecting around 1.3 million households. The Government also plans to abolish the tax reduction accorded to parents with children at secondary school or in higher education.

Much of the French Government’s focus in the area of taxation has been trained on high income earners and businesses with the proposed 75% tax on incomes over EUR1m the centrepiece of its tax policy. The controversial tax didn’t make an appearance in the 2014 budget, but another tax on executive remuneration did. The 2014 finance bill provides for an "exceptional solidarity tax" to be imposed on high salaries paid out by companies, for a period of two years. The tax is to be levied at corporate level on the share of individual gross remuneration in excess of EUR1m. The rate of the contribution will be equal to 50 percent of the amount and capped at 5 percent of corporate turnover. The exceptional solidarity tax is to apply to 2013 and 2014 income and is expected to generate EUR260m in 2014 and EUR160m in 2015, affecting 470 companies and 1,000 executives.

United States

The outlook for personal taxation in the United States remains uncertain with the likelihood that a comprehensive tax reform bill will be introduced into Congress at some stage in the next year, but possibly before the end of 2013.

Democrats and Republicans are, however, at loggerheads about certain aspects of the reform and what it should achieve, a divide highlighted by the government shutdown which began on October 1, 2013. While the former want tax reform to raise revenue to reduce the federal deficit, the latter want it to be ‘revenue neutral.’ It is also becoming clear that while Democrats are in favour of a reasonably large cut to America’s currently high corporate income tax, they are not keen on Republican plans to use money saved from eliminating tax expenditures (tax breaks, in other words) to reduce individual income tax to no higher than 25%. This will obviously benefit many of the high income households that President Obama and most Congressional Democrats want to see taxed more, not less. These differences do not therefore bode well for the upcoming debate on tax reform, and the Democrats will use their Senate majority to scupper tax legislation proposed by the House Republican majority.

The trouble is that with so many small businesses in America structured as ‘pass throughs’ i.e. they pay tax at the level of the individual business owner rather than the corporation, individual tax rates matter to a large percentage of businesses in the US as much as corporate tax rates, if not more so. Cutting individual tax, particularly the top rate, which currently stands at 39.6% and is higher than the statutory 35% corporate tax, could therefore make a big difference to small firms.

Indeed, a recent Tax Foundation paper concludes that, if improving the competitiveness of United States business is to be an objective of future tax reform, lowering both corporate and individual income tax rates will be required, given the recent growth in non-corporate business forms.

The TF notes that "there are vastly more non-corporate businesses than traditional corporations and they now earn more net income than traditional corporations. These businesses face top marginal tax rates higher than 50 percent in some states. Thus, ignoring the top individual tax rate – even while lowering the corporate rate – means the US will continue to expose a broad swathe of business to high tax burdens."

United Kingdom

A more pronounced left-right split between the main political parties in the United Kingdom has also emerged in recent weeks, and this was emphasised at the parties’ annual conferences.

Conservative Chancellor George Osborne drew attention in his conference speech to a number of tax reduction measures introduced by the Government. In particular, he described plans to increase the minimum income tax threshold to GBP10,000 as "an income tax cut for 25m people," and "equivalent to a rise of almost 10 percent in the minimum wage." 

However, the UK has been one of the few countries to cut its top rate of tax in the aftermath of the financial crisis, with the 50% rate on income over GBP150,000 falling to 45% this year. It was a move opposed by the main opposition Labour Party (and indeed by many members of the Liberal Democrats, currently in coalition with the Conservatives), and is one they intend to reverse should they get into power. In June 2013, Shadow Chancellor Ed Balls set out an alternative approach to the British economy, including a temporary cut in VAT, a mansion tax on properties worth more than GBP2m to pay for a lower 10% starting tax rate, the continuation of the top 50% income tax rate, and a tax on bankers' bonuses.

The shadow Treasury Chief Secretary Rachel Reeves later confirmed that in a Labour administration rises in income tax rates would be "focused" on those earning more than GBP150,000, whom she described as being a "privileged few."

She further explained however, that Labour doesn't "have any plans or desires" to raise taxes for those earning GBP60,000, and that a single-earner family living in the South East of England on this amount does not feel "particularly rich." Reeves's comment contrasts with a recent briefing note by the coalition's junior partner, the Liberal Democrat Party, which stated that the "vast majority" of British people consider GBP50,000 to be a "very large" salary, and that those earning this amount should be asked to make a "further contribution."


Another country where tax was a key battle ground in a recent general election was Australia, where the electorate chose the tax-cutting platform of the centre-right Liberal/National coalition against the centre-left Labor Party, which suffered partly as a result of its decision to forge ahead with a controversial carbon tax.

Tony Abbott, the new Prime Minister, has already set about repealing the carbon tax, and also wants to get rid of Labour’s tax on mining companies and cut corporate tax. On individual tax however, he made few promises; the Liberal Party’s plan for Government expressed “concerns about tax increases” but did not provide concrete pledges on individual tax cuts.

Nevertheless, the new Government has given an indication of the way it is leaning in regards to individual entrepreneurs with the revelation last month that will hold talks with the tax office (ATO) as it looks to prevent further "overreach" by the authorities in the taxation of the self-employed and independent contractors.

In an interview with the Australian Financial Review, Small Business Minister Michael Billson said that he hopes to put a stop to the "concerted attack" made by the ATO on these groups during the tenure of the previous Labor Government.

According to Billson, the issue "is less about the law itself [and more] the way in which it has been administered."

Independent contractors are subject to special rules designed to prevent tax avoidance, and must possess a tax number, an Australian Business Number (ABN) and register for goods and services tax. If someone does not have an ABN, they cannot have a business name, and their "ambition to be self-employed is cut off at the post," Bilson added.  


As it battles to stay solvent amid the eurozone crisis, Spain has had little choice but to raise taxes, and as in other countries individual incomes have been an easy target. Consequently, the top rate of tax was increased from 43% to 45% in 2011 and a ‘surtax’ was imposed on all levels of income up to a rate of 7% for those earning over EUR300,000 per year.

Prime Minister Mariano Rajoy’s conservative Government has, however, hinted that taxes have peaked with the economic prognosis now slightly more optimistic, and the draft 2014 state budget paves the way for lower taxes in the future according to Finance Minister Cristóbal Montoro.

The Government predicts that in 2014, tax revenues will be 2.4 percent up compared to 2013. The on-year increase will be mainly attributable to economic recovery, which will lead to an increase of the tax bases.

Specifically, income from individual income tax (IRPF) is expected to increase by 1.7 percent next year, compared to 2013, while revenue from corporation tax (IS) is predicted to rise by 5.4 percent. This strong rise is also primarily due to measures taken by the Government to widen the tax base.

This, Montoro indicated, will allow next year for "a selective reduction in taxes for the first time since the start of the crisis."

With the Spanish economy still fragile and in the throes of painful but necessary reform, time will tell if the Government has its sums right.

South Korea

Following widespread criticism, the South Korea’s conservative Government has had to water down the individual income tax changes it had proposed in its recently-issued 2013 Tax Revision Bill, so as to raise the minimum annual salaries subject to tax hikes.

Following accusations that the Government had designed the changes to extract additional revenue from salaried workers and the middle class, said to be an easy target with ascertainable taxable earnings, President Park Geun-hye ordered an immediate reconsideration of the proposed measures.

It was calculated that around 4.34m people, 28 percent of workers, would see their tax burden increase next year under the original proposals, which apply tax deductions to taxes owed instead of income, and restructure tax thresholds. It had been calculated that individual taxpayers with annual earnings above KRW34.5m (USD30,900) would have had to pay more in taxes.

Despite the fact that the measures were being structured to reinforce tax revenues while promoting equality in taxation and enhancing income redistribution, as lower income families would pay less tax, the Government found itself under attack from those pointing out that the measures also appeared to break President Park's promise, made during her presidential campaign, not to raise taxes to finance her welfare projects.

It has now been reported that, following a ministerial meeting, the proposals will be restructured so that annual earnings below KRW55m will be sheltered from a tax rise. That would cut the number of taxpayers subject to higher taxes in half to 2.1m.

To make up for the loss of additional revenue, the Ministry of Finance has indicated that it will sharpen up its controls and checks on suspected tax evasion by high-income individuals, by using financial transactions information obtained by the Financial Services Commission, as well as a greater use of tax information exchange agreements with other jurisdictions.


The Netherlands is currently considering more radical changes to its personal income tax system, and a Dutch committee led by Kees Van Dijkhuizen has unveiled details of its plans to simplify the country's individual income tax system, which include reducing the number of income tax brackets, slashing existing tax breaks, and consolidating other levies. The aim of the proposed reform is to boost both competitiveness and job creation in the Netherlands.

The Van Dijkhuizen committee advocated that the number of income tax rates be reduced from four to two. The body suggested that a tax rate of 37 percent be imposed on annual income of up to EUR62,500 (USD83,720), and that a 49 percent rate of tax be levied on income in excess of this threshold. As a result, the number of taxpayers in the Netherlands that fall within the first tax bracket will double to 12 million, corresponding to 93 percent of all taxpayers, the committee emphasized.

The Van Dijkhuizen committee was tasked at the beginning of 2012 with drafting proposals to simplify and to enhance the tax system, to ensure that it is more solid and resistant to tax fraud in future. The proposed overhaul was to be budget neutral and to limit the effects of fiscal drift. Both of these objectives have been met.

The Government’s response so far has been less than radical, however. In September 2013, details of the 2014 Tax Plan were unveiled, providing for a raft of tax measures aimed at combating tax fraud, redressing the public finances, securing solid tax revenues, and simplifying the tax system. The 2014 Tax Plan provides for the non-indexation of tax brackets, and for an extension of the crisis levy. 

One of the central pillars of the Government's tax package is to make it more attractive to work and to ensure a fair distribution of income. Consequently, the Government intends to increase the maximum employed person's tax credit by a total of EUR836 over a period of four years, with a planned rise of EUR374 in 2014. For taxpayers earning 225 percent more than the minimum wage, the amount of the employed person's tax credit will be dependent on income. Furthermore, the maximum general tax credit will rise by a total of EUR196 over a period of four years for those with income of up to EUR19,645. For taxpayers earning in excess of EUR19,645, the general tax credit will be linked to income. All of which will provide a welcome boost to people’s income, but can hardly be described as a “simplification”!


Finally, we come to a territory which has existed for many centuries without an income tax, but is now putting one in place, mostly in response to pressure from the European Union and other groups to become more ‘transparent.’

In July 2013, Finance Minister Jordi Cinca provided further clarification on provisions contained in the bill providing for the introduction of a tax on individual income in Andorra (IRPF).

The tax is intended to "complete" a new competitive and comparable fiscal framework, enabling Andorra to conclude double taxation agreements with other states. The tax is also designed to promote equity, in accordance with the country's constitution, and to provide greater stability and diversity of state income. Cinca made clear, however, that indirect taxation will remain a more important source of state income.

The Government aims to ensure that all citizens in Andorra contribute according to their economic means, and to guarantee that the IRPF tax system provides for low rates of taxation and for a broad tax base.

To guarantee that the future tax system has a wide base, the IRPF levy will include income from capital, as well as income from labour. A tax exemption of EUR3,000 will be granted for interest income, to protect small savers, however.

Defending the legislation, the Andorran Prime Minister Marti Petit has insisted that the IRPF tax is necessary, given that other taxes that have already been introduced in Andorra, notably corporation tax, the tax on economic activities, the levy on non-resident income, and the general indirect tax. It would therefore be extremely "unfair and irresponsible" not to subject personal income to taxation, he argued, emphasizing that the new tax model will also demonstrate Andorra's firm commitment to transparency.


Tags: tax | Tax | business | Andorra | Germany | tax rates | Finance | Europe | Australia | individual income tax | Netherlands | Spain | tax reform | European Commission | France | budget | education | United States | legislation | law | agreements



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