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The Goose That Lays The Golden Egg - And How Europe Risks Killing It!

By Editorial
September 13, 2011

Top rates of tax are on the rise across Europe as governments look to those with the broadest shoulders to bear the increasingly heavy burden of government debt which is weighing down several European Union member states.

Until recently, top rates of income tax in the EU, and indeed around the world, had been falling from the punitive rates seen in the 1970s and 1980s when governments realized that high rates of income tax generally didn't collect the amount of revenue they were supposed to, and in many cases led to a fall in revenues with wealthy citizens and entrepreneurs easily outmanoeuvring the tax authorities by moving income to low-tax territories or employing various tax mitigation strategies.

Consequently, it is rare to see tax rates of more than 50%, even in Europe's 'high tax' countries like Germany and France. But the way things are going, more and more governments are considering moving top rates back towards this psychologically significant rate (few people relish giving half or more of their income to the government, no matter how desperate the need is) , having exhausted many fiscal avenues already in a bid to raise revenue.

Somewhat ironically, the UK, which has set its stall out as one of the more economically-liberal members of the EU over the past 30 years, has trodden the path which other nations are now following having set a new top rate of 50% on earnings over GBP150,000 per year in 2010. Unlike other countries, which have announced 'temporary' hikes to income tax (is there such a thing as a 'temporary tax'?), the UK's 50% rate appears to have been put in place indefinitely by the previous Labour government, but with the election of the Con/Lib coalition to government last year, this is now causing a fierce debate between the right and the left both within the coalition and within society at large. The former argue that the new tax yields little in the way of revenue and sends all the wrong signals about Britain being 'open for business' - which Chancellor Conservative George Osborne insists it is - to the highly mobile entrepreneurs and professionals who help to create wealth and therefore economic growth (and therefore tax revenue). The latter say that it would be wrong to lower tax for wealthy people while holding rates for low- and middle-income groups. Liberal Democrat ministers are insisting that if the 50% tax must go - Osborne has indicated that it may fall as early as next year - it must be replaced by something equally as punitive on the wealthy, such as a 'mansion tax' on high-value property.

Now other countries are following suit. Italian Prime Minister Silvio Berlusconi, having reversed his previous decision to include a new 'solidarity' tax on incomes over EUR90,000 because it was against all his tax cutting principles, was forced to include an albeit watered-down version of the tax in the 'anti-crisis' budget, designed to prevent Italy from becoming the next victim of the Eurozone crisis. Italy's top rate of income tax currently stands at 43%, and the new tax will push Italy ever-closer to the 50% mark.

The French have also been debating the idea of an 'exceptional' tax on high earners as part of a package of fiscal measures intended to enable the government to meet its ambitious deficit reduction targets despite sluggish economic growth. The idea at the moment is to impose an additional 3% rate on incomes of more than EUR500,000 per year, but the idea is to be discussed at the forthcoming talks on the 2012 budget scheduled for this autumn, and is therefore subject to change. Nevertheless, the proposal in its current form would take France's top rate to 44%.

Portugal's Finance Minister Vitor Gaspar has also announced further tax measures to assuage concerns that Portugal will be unable to achieve the ambitious fiscal consolidation plans previously laid out by the government, including a 3% surtax on high incomes for the next three years.

As part of an austerity package approved by the Cypriot House of Representatives last month, all Cypriot residents with incomes above EUR60,000 per year will be required to pay a new top rate of tax from 2012.

Germany has of course had a 'solidarity' tax (paid regardless of income level) in place for the past two decades to help absorb the enormous costs of regenerating the economy of the former East Germany. However, while the recent debate in the area of taxation has centred on the size and scope of a forthcoming tax cut package, there is talk of a need to raise more in tax from the country's high earners to arrest rising levels of debt. With elections due to take place in 2013, the left-of-centre SPD recently outlined its fiscal and economic proposals, at the heart of which isan additional income tax bracket which would take Germany's top rate to 49%.

The idea of imposing or reintroducing wealth taxes on an individual's net worth is also being discussed in a number of other countries, including Austria and Spain, while higher rates look inevitable in Ireland for the foreseeable future, in spite of Finance Minister Michael Noonan's recent assertion that he will do all he can to avoid such a possibility in the December budget, the outline of which is due to be announced next month.

According to Wilbur Ross, chairman of the leveraged buy-out fund WL Ross & Co and one of the world's wealthiest men, Ireland will emerge from the Eurozone crisis faster than the other heavily-indebted nations within the bloc, and crucially, he thinks the country will do so with the economic fundamentals that made it such a success in 1990s and 2000s intact. However, Michael O'Leary, the outspoken boss of budget airline Ryanair, indicated recently that he would have no hesitation in upping sticks if the government's share of his pay packet is larger than his own. And this illustrates the fact that while the wealthy are an easy target for governments in their efforts to raise revenue, they risk killing the goose that lays the golden egg.



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