Countries Cutting Income Taxes to Remain Competitive

Increased labor mobility is forcing governments around the world to cut income taxes in order to remain competitive in the global economy, according to a new survey by  KPMG.

KPMG found that 33 of 87 countries surveyed have cut personal taxes in the past six years, while only seven have increased them.

Top rate personal income tax rates around the world have fallen by an average of 2.5 percent in the past six years, as governments strive to balance their need for revenue with the impact of increasing global labor mobility.

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

At a country level, the highest tax rates in the world are paid by the people of Denmark, with a top rate of 59 percent for the whole six years, followed by those of Sweden, whose rate came down last year from 57 percent to 55 percent, and those of the Netherlands, who have paid 52 percent 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 percent, down from 24 percent. In Asia Pacific the lowest is in Hong Kong, with 16 percent and in Latin America it is in Paraguay with 10 percent.

Among the large western European economies, France has made the most significant cut in its rates, from 48.1 percent in 2003 to 40 percent in 2007.

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 also notes that just as important as the top rate of tax rate is the income level it applies to. For example, though the US top rate of 35% is relatively high by world standards, it is only paid by those making more than US$357,700.

“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,”  KPMG says.

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.

Comments

[bearfund:]

Or perhaps by establishing a tax on capital gains and then printing a lot of money. What a great deal for debtor governments; the value of their debts falls, their tax take increases, and no one notices because they're too happy thinking they've "made money in the stock market". Great racket!

2008 Nov 03 10:58 PM

[Steven Hansen:]

yes a value added tax (consumption tax) is perfect in recessionary times.

2008 Nov 04 05:33 AM