Top personal income tax rates increased by 0.3 percent worldwide this year, according to a new report by KPMG International.
The U.S. did not see an increase in rates due to the extension of the Bush tax cuts, the report noted, but with the current tax rates set to expire at the end of the year, the U.S. could potentially see the top U.S. federal tax rate increase from 35 to 39.6 percent in 2013, if the expiration remains on schedule.
“The past year has seen increasing sovereign debt concerns in the face of a lagging economic recovery and has led some economies to increase their highest rate of personal income tax,” said Ben Garfunkel, national partner in charge of the International Executive Services practice at KPMG LLP, in a statement. “Globally, many economies are using two approaches when increasing personal income tax: either creating new income tax rate bands for very high income earners, or introducing temporary taxes to address immediate budgetary deficit concerns. In the U.S., top federal tax rates didn’t budge because the Bush tax cuts were extended through 2012. If the cuts expire at the end of the year, we can expect to see rates increase almost 5 percent.”
The vast majority of rate movement in 2012 came from the European region, according to the KPMG report. Spain and France were among several countries that reformed personal tax rates this year. France’s reforms saw the introduction of two new tax rate bands for high income earners which has resulted in the top rate increasing from 41 percent to 45 percent.
Spain also made reforms, implementing a “complimentary tax” that aims to address the country’s public deficit. The tax, which applies to all taxpayers, ranges from 0.075 percent to 7 percent depending on the individual’s income level. Earners above 300,000 euros have seen their tax rates increase from 45 to 52 percent under the reform.
Elsewhere in Europe there was very little change. Western Europe continues to have the highest personal tax rates of any sub-region globally, at 46.1 percent.
The small Caribbean island of Aruba had the highest personal income tax rate at 58.9 percent. Other countries with top rates in excess of 50 percent were largely European: Sweden (56.6 percent rate), Denmark (55.4 percent rate), Netherlands (55 percent rate), Austria (50 percent rate), Belgium (50 percent rate) and the United Kingdom (50 percent rate). There were exceptions to this from Asia and Africa, specifically Japan (50 percent rate), and new survey participant Senegal (50 percent rate).
“While these top rates may appear high, it is important to remember that a country’s highest personal income tax rate is only one indicator of what taxes individuals may pay on their income,” said Garfunkel. “Just as influential are which other taxes may apply and on which income thresholds those rates are charged.”
The KPMG report’s broader analysis also compared both effective income tax and social security rates on $100,000 and $300,000 of gross income. Effective rates are derived by taking total taxes over gross income prior to any deductions (which may include social security) to allow for a better comparison, as deductions can vary greatly across countries.
France and Belgium have the highest combined effective personal income tax and employee social security rates on $100,000 (above 48 percent for each). When the effective income tax and social security rates charged on $300,000 of gross income are compared, each of the 11 countries with combined effective rates of greater than 46 percent were European.
A copy of the report is available at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/KPMGs-Individual-Income-Tax-and-Social-Security-Rate-Survey.aspx.