High Earners Increasingly Regarded as Revenue Source

October 20, 2010 International Tax CooperationOffshore Taxation

“The old enemies of peace”The global decline in top personal tax rates looks like it has come to an end, as governments worldwide look at taxing high earners in an effort to battle their continuing budget deficits, raising the average rate by 0.3 percent in 2010.

For the last seven years top personal income tax rates have experienced a steady decline throughout the world. However, throughout the 2010 year the trend seems to have been reversed, with many countries opting to either maintain their tax rates or increase them. This analysis was published by international accounting firm KPMG, in the latest edition of their Individual Income Tax and Social Security Rate Survey 2010.

In a press release concerning the survey Ben Garfunkel, partner at KPMG, said :“Our study indicates that many of these countries are levying tax increases on their highest earning taxpayers in order to increase revenue. We also see governments becoming increasingly sophisticated and rigorous in the framing and application of their tax rules.” As an example he referred to Iceland, which, amid the collapse of its banking sector, replaced the national personal flat tax regime with a progressive income tax rate system. Additionally, he pointed to indications by China that it will target high-earners by considering imposing a capital gains tax or a luxury tax. Many governments are also displaying increasingly aggressive stances towards tax evasion by high earners, with widespread use of tax information exchange agreements and of stolen bank data in tax investigations and potential prosecutions.

The report warns that governments need to take extra precaution to ensure the efficient balancing of their tax rates, both nationally and on an international scale. Ben Garfunkel explained, saying “…high income earners typically have the talent and credentials to migrate to countries that have lower personal income tax rates and a need for skilled labor.” The emigration of highly skilled individuals could have heavily detrimental effects on economic growth, due to subsequent decrease in tax revenues, a loss of skilled labor and disposable incomes. However, tax rates that are set at a too-generous level will not provide governments with the revenues needed to maintain public services while reversing their budget deficits.

According to the report, throughout 2010, countries in the European Union currently levy the heaviest top personal income taxes and had an average increase of approximately 0.4 percent. The movement was largely attributed to the UK instating the world’s most significant rate adjustment of 10 percent. Asian nations generally chose to retain their 2009 tax rates, although the region’s average top tax rate dropped by 0.4 percent, due to New Zealand and Malaysia opting to drop their rates. Personal income tax rates in Latin America increased by the largest amount in the world in 2010, by nearly 0.8 percent.

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