Income and wealth taxes in the euro area: An initial overview
Higher taxes for those on higher incomes and the wealthy to finance the costs of the crisis and cut budget deficits are being debated in the euro area – including Germany. Several countries have already taken action. Especially the countries strongly affected by the debt crisis have in some cases significantly raised income tax rates above all on higher incomes. Spain, for example, increased the top income tax rate to 52% from 45%. In France, the marginal tax rate is planned to be as high as 75%.
In the 17 countries of the eurozone on average, the top income tax rate is currently (as of the end of April 2012) 43.1% following 42.2% last year. In 2000 – before various tax cuts in the EU countries – the rate was 47.1%.
Wealth-related taxes are also being discussed. Here, an increased grip of the State is on the cards especially for the more wealthy. For example, Spain has reintroduced the wealth tax that had been suspended since 2008. France intends to double the revenues from its wealth tax (EUR 4.3 bn in 2011) by broadening the tax base and raising tax rates again. There is no clear change in the trend (yet), however.
General wealth taxes have so far been considered to be outdated. In the years before the financial crisis, various countries – besides Spain for example Denmark, Germany and Italy – had (largely) abolished or suspended the general wealth tax. This reflects substantial doubts, for instance on the grounds of unsatisfactory fiscal efficiency due to the high costs of collection as well as the risk of negative effects on savings and investment activity. It remains to be seen to what extent such reservations will be taken into consideration in the future.
The fiscal importance of wealth taxes has been limited (so far). In some countries such as Great Britain and France, real estate taxes play an important part in municipal finances in quantitative terms. In the bigger countries of the euro area, the revenues of wealth taxes (excluding withholding taxes) come to values between 3.8% in France and 0.9% in Germany.
As far as income taxes are concerned, there is a clear trend towards higher top income tax rates. Nevertheless, top tax rates are usually still below the high levels registered at the turn of the century or – even more striking – in the mid-1980s. In the 17 eurozone countries the average top income tax rate is currently 43.1% (April 2012), compared with 42.2% last year. In 2000, the top tax rate was 47.1%. In addition, there is also a certain trend to introduce new tax brackets at the top of the tax scale.
Recently, the top income tax rate was hiked particularly strongly in Spain, amongst others, where the government under PM Mariano Rajoy raised the rate (for 2012 and 2013) from 45% to 52%. The new (temporary) marginal tax rate applies to incomes of over EUR 300,000 p.a. Furthermore, the regions are increasingly levying additional contributions: Andalusia, for example, roughly 3 percentage points for incomes over EUR 120,000. In 2007, the top tax rate was still at 43% (2000: 48%).
In 2011, the Italian government under former PM Silvio Berlusconi pushed through a surcharge of 3% limited to three years on incomes over EUR 300,000. The top tax rate is thus roughly 44.3% (general rate 43% from EUR 75,000), added by regional and local surcharges (roughly 1.2-2 percentage points and 0.1-0.8 percentage points, respectively).
In Portugal, tax rates were also raised strongly in the last two years. For example, for 2011 a surcharge of 3.5% applied to all incomes over EUR 6,790. In 2012 and 2013, another surtax of 2.5% will be levied, albeit only on incomes over EUR 153,300. The marginal tax rate has thus declined slightly to 49% from 50% in 2011. In 2006, however, it was as low as 42%. In addition, the tax deductibility for incomes over EUR 66,045 was reduced considerably.
The taxation of high incomes is to be extended most broadly in France. The new government under President Francois Hollande wants to impose a tax of 75% on incomes from EUR 1 m p.a. The new tax, which according to press reports does not necessarily imply the introduction of a corresponding top tariff of income tax, is to be enacted in autumn. So far, however, the French government is among the countries where the reductions of the top tax rate have hardly been rescinded. At 46.8%, the rate is still as high as 2007 and well below the rate of 59% in 2000.
In Germany the grand coalition decided as of January 2007 to raise the top tax rate to 45% from 42% (47.5% including the solidarity surcharge) on higher incomes (taxable incomes from EUR 250,731 for single persons and EUR 501,462 for married couples). Thus, Germany is currently in the middle third in the euro area. Partner countries such as Belgium (53.7%), Spain and the Netherlands (52% each) as well as Austria (50%), Finland and Portugal (49%) have higher rates, while above all Estonia (21%) and Slovakia (19%) have much lower rates.
In contrast to the countries mentioned above, the British government has decided to reduce the top income tax rate from currently 50% to 45% as of April 2013. The minister of finance George Osborne attributed this to the fact that, among other things, the tax increase from 40% to 50% carried out in 2009/10 did not generate any increases in tax receipts worth mentioning (“next to nothing”)1.
In terms of GDP, personal income tax revenues range from 2.3% in Slovakia, 4.3% in Greece and 5.6% in Portugal, 8.9% in Germany, right through to 11.7%
in Italy and 12.5% in Finland (and no less than 24.1% in Denmark). This not only reflects the different sizes of public sectors in the various countries, but also the characteristics of state financing. For example, Germany and France finance a major part of social services with social security contributions (revenues roughly 16% of GDP and 161/2% of GDP, respectively), while it is mainly the Scandinavian countries that largely rely on tax financing (social security contributions: Denmark 1% of GDP, Finland 12.5%, EU 13.5%).
Germany: High share of high earners in income tax revenues
In Germany the structure of government revenues is a subject of criticism due to the relatively high weight of social security contributions (2011: 15.9% of GDP or 36% of total government revenues). From the distributional perspective, social security contributions are said to have a regressive effect: there is only one fixed contribution rate for each social insurance scheme and, above all, contributions are levied only up to the respective assessable income limit (2012: EUR 67,200 p.a. for pension insurance (west Germany), EUR 45,900 for health insurance. However, it is overlooked that major social benefits in Germany, especially the statutory pension scheme and the unemployment benefit, have the character of earnings replacement benefits, i.e. are strongly dependent on contributions paid individually. Above all, incentive effects suggest this principle of equivalence. Since most benefits from the social insurance schemes are income-related, the contributions do not so much have the character of a wage tax that is a disin-centive to employment.
Social equity in Germany is primarily based on the progressive income taxation (and state transfer payments). This adjustment does have its effect. The upper 10% of taxpayers generate more than half (54.6%) of the state revenues from this tax. This share of the upper decile had fallen to 50.3% at the beginning of the previous decade as a result of the economic slump following the bursting of the dotcom bubble and due to an income tax reform. For comparison: in Great Britain, for example, the corresponding figure for fiscal 2009/10 was 54.9%. It is thus slightly above the figure in Germany.
The taxation of wealth by wealth-related taxes can be based on three approaches:
— The asset base. This is the basis for the actual wealth taxes, i.e. the general wealth tax and special wealth taxes, such as property tax.
— The asset transfer. Here, inheritance and gift taxes come into play, as well as transaction taxes such as land transfer tax and capital transfer taxes.
— The increase in value. Increment value taxes may aim at taxing the appreciation in the value of financial assets (bonds and securities) and/or real estate.
General wealth taxes were for a long time considered outdated, especially as the usually unfavourable relationship between revenues and the costs involved in collection argues against such taxes. Furthermore, financial assets are at risk of being moved abroad. Nevertheless, in the wake of the latest crises, a larger role for general wealth taxes has been advocated increasingly loudly. However, there is no clear change in the trend yet, even though Spain reintroduced this tax in 2011 and France is about to broaden the scope of taxes on wealth appreciably. Germany, Italy and Portugal continue not to impose a general wealth tax.
Special wealth taxes, especially property taxes, are relatively widespread. Their weighting varies considerably, though. While these tax revenues as a percent-age of GDP came to just below 0.5% in Germany in 2010, the rate was 2.2% in France and as high as 3.1% in Great Britain. In both countries, property tax plays a major part in municipal financing.
Furthermore, capital transfer taxes are levied in several countries. Apart from Italy (1.3% of GDP) and Spain (1.2%) revenues are rather limited, though.
All in all, the revenues generated via wealth-related taxes (excluding capital gains taxes) in the countries observed range between 3.8% of GDP in France (Great Britain roughly 4%) and 0.9% in Germany.2
On individual countries
France is among those countries which levied an albeit low general wealth tax also in the last decade. Until 2011, the tax, at rates between 0.55% and 1.8%, was clearly progressive in principle. Following a reform implemented by the former government under President Nicolas Sarkozy, currently (still) sharply reduced rates apply, i.e. 0.25% on assets from EUR 1.3 m to 3 m and 0.5% on assets from EUR 3 m. At the end of July, however, Parliament enacted a temporary surcharge on the wealth tax which is to bring an additional EUR 2.3 bn into the public coffers in 2012. As far as inheritance and gift taxes are concerned, the current allowance for children of EUR 159,325 will be reduced to EUR 100,000. Furthermore, the allowance for gifts can in the future only be set at intervals of 15 years instead of the 10 years currently in force. In autumn, a further tightening of the state’s grip on wealth is planned. For example, wealth tax rates are to be raised to the former level and the tax base to assets of above EUR 0.8 bn (while the limit for the tax liability will remain unchanged at EUR 1.3 m).
In Italy, only capital transfer taxes and property taxes matter (revenues roughly 1.3% of GDP). Since the start of the year, the tax base for property tax (standard rate 0.76%) also comprises owner-occupied housing with the municipalities being able to apply a reduced rate of 0.4%. Furthermore, the tax base was broadened by 60% as a result of the increase of cadastral values. The near-term introduction of a general wealth tax called for by various quarters was ruled out by the Italian government quite a while ago, citing the reform of the property tax as an example for government action.
In the Netherlands, the wealth tax was replaced by imputed taxation in the framework of the income tax in 2001. It is assumed that net assets (excluding owner-occupied properties at the main place of residence and operating assets in one’s own partnership) yield 4% p.a. The corresponding imputed taxation is subject to a tax rate of 30%. Actual interest income is tax-free, however. In addition, there is a gift and inheritance tax. Property tax is levied at the local level (2010 revenues: EUR 1,72 bn (0,29% of GDP)).
In Spain, the former Socialist government in 2011 reintroduced (for a limited period of time) the general wealth tax suspended since 2008 (tax rates between 0.2% and 2.5%). At EUR 2.41 bn and 0.22% of GDP, respectively, the receipts of the former tax were limited, though (see chart 9 on p. 5). In Spain, of the wealth-related taxes the transaction taxes, especially those on real estate sales, have the highest weighting (roughly 1.3%) of GDP.
In Portugal, there is no general wealth tax. Inheritance tax receipts are almost negligible, as inheritances within the family are tax-exempt and, furthermore, the tax rate is relatively low at 10%. The highest share among wealth-related taxes is accounted for by the (municipal) property tax (receipts 2010 roughly 0.6% of GDP). In 2011, the tax on some kinds of real estate was raised substantially. Real estate transfer tax receipts account for 0.35% of GDP.
Germany: Opposition parties call for higher taxation of the more wealthy
The wealth tax imposed in Germany until 1996 was a general wealth tax payable annually by natural and legal persons. The tax rate for natural persons was 1% of taxable assets and 0.6% for corporations.
Currently, above all the SPD calls for levying the tax again (in a modified form). As far as the private wealth tax is concerned, more modest assets, mainly owner-occupied housing (the usual one-family house) are to be exempt from the taxation by granting sufficient allowances. The SPD also wants to exempt small and medium-sized companies – as far as technically possible – otherwise high allowances and optimized methods of levying the tax are to ensure that the wealth tax does not overburden these companies.
The Ministry of Finance of the SPD-led federal state North Rhine-Westphalia has just presented first key points for “taxes on the very wealthy”. According to this proposal, wealth exceeding an allowance of EUR 2 m is to be taxed at a rate of 1%. With this in mind, the SPD wants to assess wealth “appropriately and fairly”. The ministry puts the expected tax receipts at EUR 11.5 bn p.a. A working group of federal states led by SPD/Green coalitions wants to work out further details. The objective is an initiative by the Bundesrat – probably even before the Federal election in autumn 2013 – targeting the (re-)introduction of a wealth tax. It is still unclear, though, how the partially conflicting goals such as high allowances on the one hand and sizeable tax receipts on the other can be reconciled.
In addition, the Greens also advocate a (transitional) wealth tax – along the lines of the equalisation tax levied in Germany following World War II.3 The tax base (the taxable wealth) is assessed once on a reference date (of the past). The tax due is then to be paid over several (ten) years. The levy suggested by the Greens is intended to bring revenues of a total of EUR 100 bn (cash value) over the considered 10-year term.
Furthermore, the two opposition parties are calling for a reform of the inheritance tax with the objective to levy higher taxes on large inheritances. Since 2000, the revenues from the inheritance tax has risen by 42% to EUR 4.25 bn. However, as a percentage of GDP, Germany at 0.165% (2010 0.178%) is in the lower third of comparable countries (France 0.4%, Netherlands 0.29%, Spain 0.23%, Great Britain 0.19%, but Italy 0.03%).
— With the stronger focus on fiscal and distributional aspects in the euro area the subject of higher taxes for higher earners and wealthy people is increasingly moving up on the political agenda. In contrast to income tax, wealth tax does not (yet) undergoes a clear change in the trend. However, the shift in the economic-policy paradigm is also likely to speed up the introduction and the increase, respectively, of these taxes.
— Wealth tax revenues are limited, though. This is shown by the experience in Spain and France, for instance. This will hardly change – especially in times of in many places depressed prices for real estate and stocks. This applies all the more when an – distributionally undesired – (increased) taxation of widely spread wealth (owner-occupied housing) as well as an exceedingly high, confiscatory taxation of the more wealthy are to be avoided.
— Financial repression in the form of higher taxes and low or even negative real interest rates are no rarity following financial and debt crises, though. (Examples include the 1930s in the US and the first half of the 1980s when various countries wanted to counteract growing public debt by raising taxes among other things. However, in the mid-1980s a countermovement set in from Great Britain and the US, which – mainly driven by globalisation – spread rapidly).
— If countries decide in favour of the state imposing higher taxes on those with higher incomes and the more wealthy, they face a difficult balancing act. Beside the fiscal and distributional targets and hopes, it has to be borne in mind that attention is to be paid to the risks to economic growth, which may result from negative incentive effects, and balance them against the former.
 BBC News, March 21, 2012.
 For calculations of potential revenues from additional wealth levies in selected euro area countries see: Gräf, Bernhard and Stefan Schneider (2012). Wealth levies to bring down public debt in the peripheral countries – problems and potential benefits. Deutsche Bank Focus Germany, 23 August 2012, p. 14f.
 For the equalisation tax introduced in 1952 wealth, mainly real estate and other assets which had survived the war, were estimated and, in the case of financial assets, an allowance of DM 150,000 was subtracted. The surplus amount was taxed at a rate of 50%.The rate charged had to be paid in quarterly instalments over a maximum of 30 years (from April 1, 1949). In the mid-1950s the revenues of the equalisation tax accounted for roughly 1.4% of GDP, but then declined strongly (1965 roughly 0.35%), also due to the strong economic growth at that time.
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Published with kind permission of Deutsche Bank Research.