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By Editorial
October 4, 2011

News on the personal taxation front in recent weeks has been dominated by reports of new taxes or increased income tax on the wealthy and high income earners as governments intensify their efforts to rein in budget deficits. This has especially been the case in Western Europe, where governments hamstrung by the eurozone crisis have a more urgent need than other countries to increase revenues and cut expenditure to reduce their reliance on borrowing.

At the back end of last month, the French government unveiled details of the country's 2012 finance bill, providing for a net increase in fiscal revenues of 7.5% to EUR273.1bn, and, crucially, for theintroduction of a temporary 'exceptional contribution' on top income earners in France.

After a certain amount of back-tracking and u-turning on the part of Silvio Berlusconi's embattled government, the Italian President Giorgio Napolitano put his signature to the country's 'anti-crisis' budget on September 15, which has the ambitious target of balancing the budget by 2013. Tax increases account for about two-thirds of this package which also includes a 'solidarity' tax on incomes, over EUR300,000 per year.

Spain has also been forced into a fevered round of fiscal fire fighting as the government attempts to persuade the EU that it is capable of emerging from the eurozone crisis using its own resources, which looks set to include those of the country's highest earners. According to reports, Madrid is examining the possibility of lifting the top rate of income tax in order to raise an additional EUR1.2bn annually. The Socialist government is also backing proposals for the reintroduction of a wealth tax just four years after the levy was rescinded. While this would doubtless be a popular measure, especially with elections round the corner, the introduction of these taxes is far from assured with analysts tipping Spain's opposition People's Party to take power next month.

The tax debate in the UK by contrast is focussing on proposals to cut tax for top earners, rather than increase it. To some extent the UK has already beaten the path which other European governments are attempting to follow by introducing its 50% top rate of tax last year. However, in the light of lower-than-expected economic growth, falling investment and lower employment, the business community and the Conservatives, the coalition government's largest party, fear that the tax is sending out all the wrong signals to talented foreign professionals and entrepreneurs and the latter are keen that the tax should be reduced or removed altogether.

According to KPMG, the UK now has the joint fourth-highest rate within the EU, sharing its position with Belgium and Austria, with only Sweden, Denmark and the Netherlands imposing higher rates. Globally, only five countries had rates equal to or above the UK's 50%. The 45% average top rate seen in Western Europe is compared with Asia's 23%. Japan and Aruba are the only countries surveyed outside of Europe with rates of or above 50%. A similar debate is taking place across the pond where the Obama administration is doggedly sticking to its proposals increasing taxation of high-income households, which the President defines as those making more than USD250,000 per year, despite fierce opposition from Congressional Republicans, who are against any sort of tax increase.

Building on the payroll tax reductions, additional tax credits and reduced tax expenditures already contained in the draft American Jobs Act, President Obama announced further measures last month to complete a package targeted at economic growth and deficit reduction in the United States, including the removal of certain tax breaks used by high-income individuals and families.

There is also a desire on both sides of the political divide in the US to simplify the labyrinthine Internal Revenue Code for the both individual and business taxpayers, as attested by thenumerous Congressional hearings on the subject over the last few months. Indeed, the need for tax simplification was brought into sharp relief by the findings of a report by a Treasury watchdog which showed that less than 40% of the returns completed by the IRS-sponsored Volunteer Income Tax Assistance programme were completed accurately. However, actions, as the saying goes, speak louder than words, and while Congressmen talk a good game on tax simplification, they are not so sure when it comes to playing it. In fact, each new bill offering temporary relief to taxpayers merely adds to the existing maze of tax compliance.

While personal income tax rises, for the wealthy at least, seem to be the trend at the moment, there have at least been efforts in some countries to simplify the tax compliance burden on individuals. On September 30, the Australian government released draft legislation for consultation on proposals to introduce a standard deduction for individual taxpayers for work-related expenses and the cost of managing tax affairs. According to Assistant Treasurer Bill Shorten, this would remove the hassle of a "shoebox full of receipts" while also simplifying the administrative burden for the Tax Office.

There was also some encouraging news on the simplification front from the UK government, which announced on September 29 that Michael Jack and John Whiting have been appointed as the permanent Chair and Tax Director respectively of the Office of Tax Simplification (OTS), following a recent report that HM Revenue and Customs (HMRC) has 'given up' tax revenue worth over GBP27bn over the last five years as a result of complexity. The OTS was set up in July, 2010, with the intention of finding ways to simplify the tax system and reduce administrative burdens on businesses and individual taxpayers. Commenting on the appointments, Exchequer Secretary to the Treasury, David Gauke, said: "The government believes that taxes should be simple to understand and easy to comply with."

Efforts towards simplifying tax compliance for individual taxpayers in Germany took a step forward last month with the passing by parliament of the amended tax simplification law, although there are doubts that this will make much of an impact. One key element, that of introducing a two-year tax return process, was dropped, and the bill had to be modified in other ways as well in order to clear the Bundesrat, or upper house of parliament.

So, not much good news for individual taxpayers in recent weeks and months if you happen to live in Europe or the United States, and despite some governments' efforts to improve the lot of individual taxpayers, especially in the low- and middle-income groups, these are likely to be cancelled out by the ultimate need to raise revenue.



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