Institute for Research in Economic and Fiscal issues

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Taxing the Rich: a Promising Tool According to Many European Member States

The sovereign debt crisis forces our governments to stretch their imagination in order to find additional budget revenues. In Europe, as well as in the US, many voices call for additional contributions from the rich (not such a big stretch of imagination, in fact, if it was for the already high contribution asked from them). Interestingly, some eminent wealthy people like Warren Buffet in the US or Liliane Bettencourt (L’Oréal) in France welcome the idea, denouncing a system that deprives them from the possibility of making an equitable tax contribution (read more about this here).

Clearly, extra tax revenues from the rich would be highly insufficient to erase the huge debt and deficits eroding the States. But taxing the rich remains an easy and populist “solution” to be offered to a worried population and to buy time before the crash (or at least the next elections). In Europe, several governments have already taken such step, introducing new taxes or simply raising the top marginal tax rate. In France, an additional 3% tax on annual incomes over €250 000 and a 4% tax for incomes above €500 000 has been enacted. The measure will apply to 2011 revenues and is supposed to be repealed whenever France will reach again the Maastricht target for budget deficit set at 3% of GDP. It follows last year’s increase of the top marginal income tax rate from 40 to 41%. The rich will also have to pay higher social contributions on capital gains.

Portugal is following the same path raising its top income tax rate from 42% in 2010 to 46,5% in 2011 and 49% in 2012 (income tax top bracket starts at €153 300). In the UK, the increase of the top marginal rate in 2010 was also spectacular – from 40% to 50% at a threshold of £150 000/year. In the same vein, Italy has introduced an extra 5% on income earners above € 300 000. This brings the top rate from 43% to 48 %. In addition there are the municipal and regional piggy backs on the national income tax, increasing the marginal tax rate by about 2.3 points (depending on distinct subnational governments).

Other States are considering the introduction of similar taxes, and keep debating the issue. In Denmark two out of the three parties in a recently formed coalition government (October 3rd) had proposed that a 6 percent “millionaire tax” be levied on incomes above DKK 1 million (€133,333). This proposition, made before the election when those parties were still in the opposition, would raise the top income tax to 61.5%. Since the elections and thanks to the third coalition partner, the idea has been dropped and they are instead talking now about a tax reform that would “substantially” reduce the tax on labour income (but with a “just social profile”). Meanwhile, the top marginal tax remains at 56.1%, kicking in at incomes of about 56 500 €/year.

In Germany, the social democrats are in the early stages of a campaign to promote higher income tax rates for the rich. They put forward two competing proposals: Either (i) raise the top marginal income tax rate from 42% to 45%, on incomes above €60 000 (which would imply a reduction of this threshold from the status quo), or (ii) raise it from 42% to 49%, but leave the threshold at €100 000.

In Belgium, an increase of withholding tax on interests is expected (from 15% to 20% or 25%) and maybe a taxation of capital gains.

In Sweden, although some opposition leaders proposed to raise the world’s highest top marginal tax rate on incomes (67%), the proposition has no chance to be passed by the parliament. The let’s-have-the-rich-pay mood is propagating even to some of the new member States that are usually pro-market and low tax adepts. Hence, in Lithuania where a 15% flat tax is levied on incomes, a number of proposals are currently being debated in the parliament that would reintroduce progressive income taxation.

But such is not the case everywhere! Bulgaria sticks to a 10% flat tax rate for incomes and benefits without thresholds. And in Slovakia there is a government proposal now waiting in parliament for approval allowing the rich (yearly income above €20 000) to apply the basic deductible (approximately €680) hence reducing their effective tax rate.

Good news are also coming from the Netherlands where the state secretary of finance proposes to introduce a flat tax for entrepreneurs instead of the progressive income tax rates up to 52%. It could be a step in the direction of a general flat tax for all income tax payers. And least but not last, Luxembourg has removed the “crisis contribution” introduced for the sole year 2011. This contribution was set at the rate of 0.8 % and was levied on all professional income, replacement income as well as on income from assets received by individuals in Luxembourg . The effective maximum income tax rate for individuals will thus be at 41.34% for 2012.

Good news indeed… At least for those who hold that you will not find a path to economic recovery and higher tax revenues if you insist on “having the rich pay” for spending programs that remain unchanged. Incentives matter!

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