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TAXING HIGH INCOMES a Comparison of 41 Countries

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TAXING HIGH INCOMES a Comparison of 41 Countries An EPICENTER publication TAXING HIGH INCOMES A comparison of 41 countries Gustav Fritzon and Jacob Lundberg Timbro, Tax Foundation, Epicenter October 2019 3 Contents About the authors 4 Summary 6 Introduction 8 Results by region 14 Methodology 17 Country notes 21 References 45 44 About the authors 55 Jacob Lundberg is chief economist at Timbro, a Swedish free-market think tank. He holds a PhD in economics from Uppsala University and specializes in taxation. Gustav Fritzon is an intern at Timbro. He holds a law degree from the London School of Economics. The authors are grateful to Adam Bartha (Epicenter) and Daniel Bunn (Tax Foundation) for helpful comments. They would also like to thank Marta Quintín (Civismo, Spain), Klāvs Zutis (Bank of Latvia), and Viktorija Jureviča (Ministry of Finance, Latvia) for their assistance in obtaining information about the tax systems in their countries. 6 Summary ● This report compares top effective marginal tax rates on labour income in 41 OECD and EU countries. ● The top effective marginal tax rate is the total tax paid on the last dollar earned by a high-earning worker, taking social security contributions and consumption taxes into account in addition to income taxes. It is a measure of the degree of progressivity and redistribution in the tax system, and is of great policy interest. ● The highest marginal tax rate is found in Sweden, 76 percent, and the lowest in Bulgaria, 29 percent. ● In general, the Nordic and the Western European countries have the highest effective tax rates. 7 Top effective marginal tax rates in Europe Top Effective Marginal Tax Rates in Europe LT 44% IS #31 59% #16 CZ 48% #26 FI 71% #5 EE SK NO SE 54% 45% 62% 76% #19 #30 #11 LV #1 50% #24 AT DK 65% IE 66% #8 64% #7 #9 NL GB 59% 59% #13 PL 51% #15 DE #22 55% #18 HU RO FR 57% #17 50% 69% #23 #6 BG 29% PT #32 72% ES TR #4 46% 54% IT #29 #20 54% #21 BE LU CH SI HR MT GR CY 73% 59% 46% 73% 64% 48% 62% 47% Top Effective Marginal Tax Rates in Europe #3 #14 #28 #2 #10 #25 #12 #27 Lower Higher TAX FOUNDATION 8 Introduction High marginal tax rates on personal income have received renewed interest in recent years. For example, left-of-centre economists Emmanuel Saez and Thomas Piketty have proposed raising taxes on high earners to 80 percent (Saez & Piketty, 2013). American Congresswoman Alexandria Ocasio-Cortez has suggested a 70 percent top marginal tax rate (Kapur, 2019). The taxation of high-income earners is indicative of the overall level of redistribution in the tax system and of the magnitude of distortions the system causes. As such, it is perhaps the prime example of the conflict— central in public economics—between efficiency and equity in tax systems. Top marginal tax rates are therefore the subject of much academic interest (e.g., Saez, 2001). The political discussion around taxing high-earners usually revolves around the income tax, but in order to get a complete picture of the tax burden high-income earners face, it is important to consider effective marginal tax rates. The effective marginal tax rate answers the question, “If a worker gets a raise such that the total cost to the employer increases by one dollar, how much of that is appropriated by the government in the form of income tax, social security contributions, and consumption taxes?” In principle, it does not matter how the tax burden is distributed among the various taxes—all taxes that affect the return to work should be taken into account. Despite their policy importance, data on effective marginal tax rates is not readily available, since they are complicated to research and compute. To our knowledge, this is the only recent comprehensive compilation of 9 top effective marginal tax rates in advanced economies.1 Combining data mainly from international accounting firms, the OECD, and the European Commission, we are able to calculate marginal tax rates in the 41 members of the OECD and/or EU. The methodology is described below. The full country ranking is shown in Figure 1. There is wide variation in the effective marginal tax rates: from Bulgaria, at 29 percent, to Sweden, at 76 percent. Twenty-nine countries have effective marginal tax rates higher than 50 percent. The average of all countries is 56 percent. Regional differences are analyzed in more detail in the next section. Countries should be cautious about placing excessive tax burdens on high-income earners, for several reasons. In the short run, high marginal tax rates induce tax avoidance and tax evasion, and can cause high-income earners to reduce their work effort or hours. Under reasonable assumptions about behavioural responses to taxation, the Laffer curve—which shows the relationship between the tax rate and tax revenues—peaks around 60–75 percent for high incomes. This implies that many OECD countries are close to the tax revenue peak or have surpassed it (Lundberg, 2017a). In the long run, high marginal tax rates can affect career choices and migration decisions. They also lower the return to education and entrepreneurship. Governments differ in the type of taxes they levy (see Table 1 below). All countries in the sample have a central income tax and some sort of consumption tax (state sales taxes in the United States and VAT in all other countries), but apart from that, they do not have much in common in how they tax high-income earners. Eleven countries impose local or regional income taxes and 13 have solidarity contributions or similar surtaxes on high incomes. Twenty-three levy uncapped social security contributions on employees and 26 on employers. This underscores the need to consider the full spectrum of taxes when comparing marginal tax burdens across countries. For example, Hungary has a flat income tax of 15 percent while the United States has a progressive federal income tax with a top marginal tax rate of 37 percent. As payroll and consumption taxes are low in the United States, the effective marginal tax rate is not much higher, at 47 percent. In Hungary, on the other hand, 1 This report is an updated version of Fritz Englund & Lundberg (2017), which compared top marginal tax rates in 31 countries. OECD (2019a) calculates effective marginal tax rates, but not for top incomes and excluding consumption taxes. 10 substantial social security contributions are paid by both employers and employees. In addition, the country has the world’s highest VAT. The result is an effective tax rate of 57 percent—13 places higher than the United States in the country rankings. The six countries with the highest effective marginal tax rates all have high payroll taxes. This is in contrast to most countries, where for high- income earners payroll taxes are low or zero at the margin, as the social security benefits that they are often associated with have earnings ceilings. The levying of high payroll taxes has been criticized as a way of obfuscating true tax burdens, as payroll taxes are not included in taxable income and typically not reported to employees (Sanandaji & Wallace, 2011). Countries also differ in where the top marginal tax rate starts to apply. Mapping this would be very complicated, as taxes may have different thresholds. For example, the threshold for solidarity taxes may be different from the top income tax bracket. It should also be noted that the top marginal tax rate is by no means always the highest tax rate, since social security contributions often only apply up to a ceiling. 11 Figure 1. Top effective marginal tax rates in 2019 and their composition. 1. Sweden 76% 2. Slovenia 73% 3. Belgium 73% 4. Portugal 72% 5. Finland 71% 6. France 69% 7. Denmark 66% 8. Austria 65% 9. Ireland 64% 10. Croatia 64% 11. Norway 62% 12. Greece 62% 13. Japan 60% 14. Netherlands 59% 15. Luxembourg 59% 16. United Kingdom 59% 17. Iceland 59% 18. Israel 58% 19. Hungary 57% Average 56% 20. Canada 55% 21. Germany 55% 22. Estonia 54% 23. Spain 54% 24. Italy 54% 25. Australia 54% 26. South Korea 53% 27. Poland 51% 28. Romania 50% 29. Latvia 50% 30. Malta 48% 31. Czech Republic 48% 32. United States 47% 33. Cyprus 47% 34. Switzerland 46% Income tax 35. Turkey 46% Employees' social 36. Chile 45% contributions 37. Slovakia 45% Payroll tax 38. Lithuania 44% 39. New Zealand 44% Consumption tax 40. Mexico 42% 41. Bulgaria 29% 0% 20% 40% 60% Source: Own calculations, see text. 12 Table 1. Top-bracket tax rates for 2019 in percentages. Effective Employee social Payroll Consump- Country Income tax marginal contributions tax tion tax* tax rate Local/ Deduc- Nondeduc- Central Surtaxes regional tible tible Australia 45 2 5.52 8 53.59 Austria 55 6.9 16 64.73 Belgium 50 3.5 13.07 27.13 15 72.85 Bulgaria 10 21 28.83 Canada 33 17.46 9 54.88 Chile 35.5 0.02 15 44.88 Croatia 36 6.48 16.5 27 63.97 Cyprus 35 18 46.60 Czech 15 7 13.5 19 47.77 Republic Denmark 52.05 8 23 66.19 Estonia 20 1.6 33.8 23 54.48 Finland 31.25 19.88 9.79 21.04 20 70.74 France 45 4 7.2 2.9 22.67 15 69.29 Germany 45 2.48 14 54.73 Greece 45 10 16 62.18 Hungary 15 18.5 17.5 24 57.18 Iceland 31.8 14.44 6.85 19 59.04 Ireland 40 8 4 10.95 18 64.35 Israel 47 3 15 57.63 Italy 43 4.23 13 54.02 Japan 45 10 0.95 0.3 1.19 8 60.02 Latvia 23 8.47 14.5 17 50.35 Lithuania 27 6.98 16 44.45 Luxembourg 42 3.78 1.4 23 59.18 Malta 35 20 48.08 Mexico 35 2.49 9 42.13 Netherlands 51.75 16 59.29 New 33 16 43.64 Zealand Norway 38.2 8.2 13 21 62.32 Poland 32 4 2.45 1.22 3.81 18 51.37 Portugal 48 5 11 23.75 16 71.77 Romania 10 35 2.25 13 50.29 Slovakia 25 4 10.8 15 44.67 Slovenia 50 22.1 16.1 20 73.33 South Korea 41.16 4.12 0.65 2.6 11 53.23 Spain 22.5 24.61 13 54.10 Sweden 25 32.19 3 31.42 20 75.70 Switzerland 11.5 22.39 5.63 5.63 9 46.02 Turkey 35 1 2 14 45.95 United 45 2 13.8 12 59.10 Kingdom United 37 5.08 2.35 1.45 4 47.33 States 13 See methodology and country notes for details.
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