Monday, May 22, 2006

Tax Burdens - Country Comparisons

In the May 22, 2006 Forbes article "Overall Tax Burden and Government Spending," Jack Anderson reports the U.S. tax burden is relatively low compared to other Organisation for Economic Co-operation and Development (OECD) countries:
After examining the Forbes Global Misery and Reforn Index, you now can look at all taxes at all levels of national and local government and total government spending, The Overall Tax Burden and Government Spending Table , which measures total tax burden in OECD countries as a percentage of gross domestic product, (“GDP”). This table uses the most recent official numbers available which are for 2004 and thus there is a time lag, but this gives us a good picture of what is happening. This Table is done to make sure that a reduction in the top marginal rate shown in the Misery & Reform Index is not lost through a change in the tax base, deductions or the progressiveness of rates or in the creation of new or hidden taxes at national, regional or local levels. This Table generally follows the Misery & Reform Index ranking with six of the top ten OECD countries in the Misery and Reform Index are also at the top of the Overall Tax Burden and Government Spending Table.

More specifically, this Table shows as does the Index that globally the tax bite dropped slightly from the prior year, with sixteen countries reducing total burden, six remaining constant and eight increasing tax burden. Despite this reduced overall taxation burden , it continues to remain in all of the countries above the levels of taxation of 1965 and only nine countries have decreased total taxation since1980 as a percentage of GDP. Of course, in absolute amounts, the government coffers have grown with their economies to historically unprecedented colossal amounts. The only surprise is there are not more dramatic tax revolutions as there have been historically. The confusing statements about the falling power and shrinking size of governments and the rising power of global corporations, at least in terms of what governments consume in taxes from the GDP of the country’s entrepreneurs and in absolute terms, is misplaced. Specifically, the nine exceptional countries, almost half now released from the burden of communism, that have decreased the amount of taxes in terms of the percentage of the GDP consumed by their government since 1980 are as follows: Belgium, Czech Republic, Hungary, Ireland, Japan, Netherlands, Poland, Slovakia and USA.

We also again include the Overall Government Spending results by each of the governments. Many governments are continuing the trend to reduce taxes, but the harder task of reducing spending is still to be accomplished. Only one-half of the countries reduced spending from the prior year. The solution to deficits is not to reverse the trend in tax reform, at least for those on the top of the Table and Index, but to control spending growth while the economic growth increase the absolute amount of tax revenue.

Comparing the Overall Tax Burden to the Overall Government Spending shows that all countries are spending more than they are taxing. This overall trend is not just a Keynesian cyclical exception. This difference in burden and spending is only partially covered by the increasing “budget deficit”. This difference is also partially covered by additional “revenues” that governments do not consider to be “taxes” including user fees and service charges, “profits” from government owned companies and monopolies and the sale of state assets, such as privatizations of state owned companies or sale of its real estate or its gold reserves. Thus the Overall Tax Burden is understated and hidden from taxpayers, but not from Forbes readers. Also note that the budget deficit that is covered by government borrowings require future taxes to repay the debt and currently service the interest payments (now among the top two or three expenditures of too many governments and these increased government borrowings also indirectly increase the interest rate paid the entrepreneur as an additional “tax”). The reality is the appearance of progress in tax burden in the analysis is partly masked and false due to government misreporting.

While the Misery & Reform Index charts the marginal tax cost on a growing business and its top executive, it is also important to look at the total taxes imposed by a country at all levels, national and local, as compared to its GDP to measure the overall burden.

Importantly, we also look in this table at Overall Government Spending at all levels of government, which in all cases is greater than the Overall Tax Burden. The resulting deficits are covered by debt, hidden taxes, profits from state owned monopolies and the privatization and sale of government assets. This allows the reader to be aware of the broader base of current and future total taxation issues. This is the latest official data from the OECD and is for 2004. It takes governments a year to count their colossal tax revenues and expenditures.

Tax Misery & Reform Index: Which countries are the best and worst for entrepreneurs and businesses?


Click the image above to enlarge it.

In the May 22, 2006 Forbes article "Tax Misery & Reform Index," Jack Anderson explains that the tax burden in the United States is low compared to most other countries in the world.

Asia continues to look attractive in our annual ranking of tax burden. And even China's bum score may be deceiving.

Our 2006 Tax Misery & Reform Index offers a global view of the top marginal rates of taxation--the ones that typically most affect a successful entrepreneur. The news is good as the rates generally continue to decrease around the world.

The Misery scores--a sum of six tax rates--are lower in 16 of the locations this year, with France decreasing the most (although still in the top position). There was no change in 28 locations, and only 8 increased Tax Misery (7 of them just slightly). Overall, the original European Union-15 and China have the highest levels of Tax Misery--China because of its extraordinary social security and pension rates. The lowest levels generally continue to be in the rest of Asia, the Middle East, Russia and the U.S. (Keep in mind that countries at the bottom of our chart are the most tax-friendly to entrepreneurs and wage earners, while those at the top are the harshest.)

China's "miserable" score comes with a big qualifier. Social taxes tend to have income caps that spare the highest earners, and special tax holidays for foreign investors and expatriates keep the "effective" rate of taxation (as opposed to the top "marginal" rate) closer to the other Asian countries. But a specific measurement of net take-home pay (after income and social taxes) for a top executive reveals that only one other Asian country, Japan, leaves the executive with less than China does. And the Chinese taxman's work is never done: A new levy on the 45 billion pairs of disposable wooden chopsticks used annually will push conservation as well as increase revenues.

Almost half of the countries on the bright side of global taxation are Asian, including Hong Kong and Taiwan. Singapore continues to lower levies, and Korea codified its new low 17% flat tax (but only for expatriates), which is less than half the top 39% local rate in the Misery Index. India remains at the low end, despite this year's five-point upturn. Japan, although reducing its Misery score, has been hardening its tax treatment of expatriates and remains, with China, the tax worry of the Asian region. Indeed, Japan is not likely to be improving its score in the short run, if expectations of higher consumption taxes to close a massive budget deficit prove out. The nation oughtn't take current glimmers of economic growth for granted.

Not surprisingly, eight of the top ten countries on our list are European. France, though still at the top of the Misery Index, also showed the most reform this year (with a reduction of eight points) by reducing taxes under besieged Prime Minister Dominique de Villepin. A top individual progressive tax rate of 40% is down from 48%. A high earner is now charged this on his incremental salary and investment income, as well as an 11% flat tax on all pay.

Germany, despite a record of reform since 2000, went substantially in the other direction this year. The reforms that were anticipated under former chancellor Gerhard Schröder were not realized. Instead, taxes were increased in 2006 by the new coalition government of Chancellor Angela Merkel. (Our index records planned tax moves, ahead of their full enactment--so we must adjust when implementation falls short.)

We show Germany from the perspective of Berlin--where state and local taxes are a significant factor. (Same in the U.S.--note the difference between New York and Texas.) A top-earning Berlin entrepreneur is now looking at 14 additional points of Misery.

As with China, you have to consider special provisions for multinationals and expatriates. Here France has also been making concessions, but elsewhere in Europe this flexibility is being limited. This only makes seemingly high-tax China, which gives the foreign direct investor a ten-year tax holiday, more of a magnet for international capital.

Jack Anderson is an international tax attorney in the U.S. and EU, and a member of the French bar, the U.S. Tax Court and the California and New York bars. He is also a CPA, M.B.A. and partner in an international law firm in Paris. E-mail: