Wednesday, 16 January 2013

Graph of the week: World's highest tax rates

From a report done by KPMG that came out last week, comes the following chart on "the highest effective personal tax rates in the world": (click to enlarge) 

Source: KPMG
HT: Business Insider 

The chart shows only the top 40 countries with high income tax rates. The US is 55th on the list, while the UK made it in the top 40 (it's 37th). Click here to see the rest of the rankings. 

Let's focus only on the international competitiveness side of the story, setting aside the fact that high income tax rates demotivate successful and talented individuals from staying in the country (yes, by talent I also imply acting and the case of Gerard Depardieu). 

When talking about international competitiveness income tax rates also play an important role, sometimes even more important than corporate tax rates. I'm particularly happy with this graph as it included employee social security rates to calculate the overall burden, which are often overlooked but still play an important decision-making factor in determining total labour costs for a business (i.e. for an investor). 

It's justifiable to have high tax rates in highly efficient and institutionally strong countries like Denmark, Germany or Sweden, since they have other factors that attract capital, investments and motivated individuals into these countries. I'm not saying lower taxes wouldn't help them further increase their competitiveness (as they did in Sweden), but their size of government is somewhat justified by its efficiency in providing public goods and not expropriating wealth. These are the two essential functions of the government anyway, so as long as investors and individuals perceive a stable institutional environment where their wealth won't be diminished by bureaucrats, corruption or similar factors, I guess they would be willing to accept higher taxes. 

For countries like Greece or Croatia (or similar countries you may find interesting on the list) this certainly isn't the case. Their states are seriously inefficient in providing public goods or in attracting investors via institutional stability, so their emphasis must be either on changing this serial inefficiency of the government from within (via a public sector reform) or through lowering the overall tax burden thereby making itself more competitive on the international market. This implies a labour market reform, and a reform of the entitlement system, or else the countries could face serious budget deficit problems in the short run. But keeping high income tax rates, and a high overall tax burden in the situation where their economies are undergoing a 6-year long depression, is absurd. No matter what the rating agencies say on how to misuse austerity and how to close the budget deficit with tax hikes, continuing with this policy for too long will not only destroy the country in the short run, it will completely shatter its outlook in the long run by causing a brain drain and resource depletion. 

The no.1 on the list, Belgium, is a case study by itself. Have in mind that this country didn't even have a government for a year and half. It's economic and tax policies should be observed through the lens of a possible separation and the consequential variety of interest groups who need to be satisfied. 


  1. I think that the best way of attracting investments during a recession and a recovery is to have a combination of stability and pro-growth institutions and a low overall tax burden. That's why even among the countries you call institutionally strong there is a competition in tax rates to where one should open a business in or live in.
    For example, why should I open a business or live in Germany or France, when I can get the same stability and quality of life in Canada or Switzerland which have much lower top income tax rates.

    1. Canada may not be the best example of a competitive low tax environment, but I see your point. However, I think the attractiveness of living in the mentioned countries goes far beyond the income tax rate. Apart from France obviously, since levying a 75% marginal tax rate is very likely to drive some of its richest out of the country.

  2. Do not be fooled by the apparent low income tax rate in the USA. In addition we have social security taxes, Many states have their own income taxes, and there are always a variety of other taxes to pay.

    1. I think they did include the social security tax, although I'm not sure about the employment tax.
      However, I checked the report and the US and Canada data are for federal level tax rates only. Adding state income taxes this would surely increase the overall burden.

  3. You did announce that you will write about international competitiveness, but somehow ended with the story of efficient/inefficient welfare states, and I agree with every word you wrote.
    But, I was thinking about Charlie's post, and the fact that these numbers are rates that apply for 100.000 USD gross income. While I do agree that 50% effective tax rate is horror, somehow my thoughts go towards the way investors reap the rewards of international investments. It is my belief (therefore not a fact that I am absolutely positive about) that in most cases they expect return on invested capital in form of profit or capital gains, not in form of personal income (it also has to do with legal form of the business). Now, I am talking what I believe is a big share of international investment activity -thats why I hardly see any business thinking about investing abroad and earning an income there. If we are talking about labour costs, thats another thing, but it didnt stop some places like Germany from being one of the world's most popular places to invest in. I overcomplicated a bit, but what I basically wanted to say is, while I dont think this is irrelevant, I believe most corporations who invest outside of their home country (probably all by now) primarily see return on capital (which in the end can be affected by high taxes on income, and in this case - if they employ people whose incomes are 100.000USD abroad (other than management), which is very unlikely) Maybe it would be better if we saw rates on median incomes, but then other methodological problems would probabli arise.

    1. You're right, expected return on capital is the key motivation factor of investors, while the main decision factor would then be the corporate tax rate. However, I was mostly thinking about the impact on labour costs for a business that wishes to invest abroad.

      Now, the marginal rates that apply for the over $100,000 income earners certainly aren't applied to the workers an investor hires (let's think about greenfield investors for the sake of the argument), but can send a very good signal on how open to foreign investors a country is. It basically means that in countries with very high top income tax rates creating wealth and multinationally competitive businesses is being discouraged (think in terms of CEO wages for example). This is particularly worrying for a country which based its pre-crisis growth model on inflows of foreign capital and credit (like Croatia for example). Large countries like Germany attract investors with a multitude of other factors, top of which is institutional safety.

      To sum up, I believe that top marginal income tax rates in small open economies don't necessarily directly affect investments, but they certainly do send indirect signals to investors. And I do agree with your point that median income rates would give us an even clearer picture

  4. Even though the standardization of measurements has its problems, the main reason of doing so and taking an income of $100,000 is to average out the between country differences in incomes. Sure for some of the countries on the list, a $100,000 yearly income is the top income grade, but in the UK for example (or USA, Germany, France, etc.) the top income grade is much larger. So they were basically comparing the top income rate tax in some countries to the median income rate in others. It's very hard to analyze taxes that way..
    Then again, I strongly agree with your conclusions on the size of government and the absurdity of taxing oneself out of a recession. But comparative analyses based on observing a single income group can't tell us precisely what the issue is in some lower income economies. .

  5. Your figures are in error. The taxes for both Clinton and Bush were calculated using the maximum rate for that selected income. For instance the Clinton 1999 tax rate on 30K was 28%, which is what they used to get the 8400 figure. However taxes are not calculated that way. The first 25K of income would have been 2013 tax brackets at the lower 15% bracket first, thus yielding a much lower figure than what you show.I am not arguing that Bush doesn't have lower taxes. He certainly does. Of course he obtained his lower tax brackets by using deficit spending and increasing the national debt. Add back in the interest payments we'll be making and I bet Bush actually cost taxpayers far more than Clinton ever did.

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