Global downward trend in top rates of personal tax about to reverse
20 August 2009

The global decline in top personal income tax rates over the past seven years may be about to reverse according to a survey released today by KPMG International. According to it's Individual Income Tax and Social Security Rate Survey, the top average personal income tax rate dropped 0.3 percent worldwide in 2009 to 28.9 percent from 29.2 percent in 2008. But this trend is likely to reverse due to the need for new sources of budgetary and stimulus funding among governments. The UK was among the first to announce a rise in its top rate of personal income tax with it set to go up from 40 percent to 50 percent next April.

And other countries beyond the UK are already making plans to implement personal income tax rate increases for its top earners with still more examining this option, according to subsequent country budgets and income levies, says KPMG. “In the current economic environment where countries face increasing budget deficits and need funding for various economic stimulus packages, it is becoming clear that some are turning to those in the highest income brackets amongst their current tax bases to increase revenue,” said Sue Bonney, head of tax at KPMG Europe LLP.

“Our study has recorded a general decline in top personal income rates over the past seven years, but in 2010 we are seeing indications that a reversal may be on the way, as there is speculation around increasing the top rates in the US and a few countries in the European Union - here in the UK and also in Ireland, specifically - are already proposing rate increases for its top earners,” she added.

According to the KPMG study, the highest personal income taxes in the world are still paid by the citizens of the European Union (EU). But with the introduction of flat rate taxes in a number of Eastern European countries – including Latvia and Poland, which reduced their top rates to 23 and 32 percent respectively for 2009 – average rates have fallen from 41.1 percent in 2003 to 36 percent in 2009.

High top rates of personal tax could damage a country's global competitiveness

Sue Bonney warned that raising the top rate of personal tax could make it hard to attract top end talent to some countries which could impact on their growth prospects. “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 labour, so a shift in personal income tax rates could potentially impact global workforce mobility trends and starve some countries of so-called mobile talent.”

And according to Sue Bonney, tax is a significant issue for the employer also. She explained: “As HR professionals are being asked to re-evaluate the costs associated with international assignment programs, income tax rates become an important consideration when deciding where to send an assignee. Assignees also need to be aware of how various taxes will impact their income both at home and in-country.”

Denmark has highest rates worldwide

Denmark – when looking at social security and the personal income tax rate together – has the highest personal income tax rate at 62.3 percent. In the Asia-Pacific region, Japan has the top rate at 50 percent. Chile has the highest rate in the Latin American region at 40 percent.

KPMG’s 2009 survey also included an analysis of social security rates, specifically examining income tax and social security rates for gross incomes of employees earning 100,000USD and 300,000USD. Social security components can vary significantly by country, employer and employee type.

When taking both the personal income tax rate and social security rates into account for employees earning 100,000USD, the countries with the highest rates were Slovenia (54.9 percent), Croatia (53.5 percent) and Hungary (48.1 percent). For employees earning 300,000USD, the countries with the highest rates were Slovenia (60.4 percent), Denmark (57.1 percent) and Croatia (54.5 percent).

“Social security is often a forgotten tax and many countries are talking about increasing contributions made to these programs,” said Bonney. “HR professionals need to consider social security along with the entire gamut of taxes – national, state, municipal, etc. – in order to better inform their international assignment program decisions and discussions.”

The study also reviewed contribution requirements (for both employer and employee) for employees earning gross income of 100,000USD and 300,000USD. France had the highest combined rate at approximately 60 percent under either scenario, followed by Belgium at 47 percent and then Hungary and Italy both in the lower 40 percent range.

KPMG’s 2009 Individual Income Tax and Social Security Rate Survey is a cross-border survey of personal tax and social security rates with historical data from 2003-2009. The report covers 86 countries, concentrating on the highest level of personal tax payable to the central government. For ease of comparison, the survey has excluded, where possible, other taxes such as state and municipal taxes.

The study was commissioned by the global International Executive Services practice, comprising professionals from several KPMG International member firms.

KPMG’s 2009 Individual Income Tax and Social Security Rate Survey