“Because that’s where the money is”.
So replied the infamous US bank robber, Willie Sutton, when asked why he robbed banks (according to legend anyway).
There are many European leaders who could give the same reply today when asked why they are raising taxes for their wealthier citizens.
From Germany to Greece, as the Euro crisis plays out and budget deficits prove harder to curb, governments increasingly need to raise tax revenue. Tax hikes have become all too familiar, and while some affect all taxpayers, most of the burden is being placed on those with higher incomes and/or substantial assets.
“Can the rich save Europe?” ponders Handelsblatt, a Germany newspaper, as it observes that across the EU “the race is on to come up with more creative ideas for the taxation of the rich and the super rich”.
In the UK, Deputy Prime Minister and Liberal Democrat leader, Nick Clegg, recently caused a stir when he called for the introduction of a new “emergency” wealth tax. He suggested it would make those with “considerable wealth” feel as though they are making a contribution to the national effort.
The idea was still shot down by Chancellor George Osborne who said he did not want to drive wealth creators away, but Shadow Chancellor Ed Balls said a future Labour government could bring in a form on wealth tax on high-value properties. This is similar to the idea previously floated by Liberal Democrat Business Secretary Vince Cable, who has been calling for a permanent ‘mansion tax’.
Across the Channel, French President François Hollande has made no secret of his view that the wealthy should pay more tax. Indeed, his plan to impose a whooping 75% tax on revenues over €1 million was a key plank in his electoral campaign earlier this year. A new 45% top rate of income tax on income over €150,000 is also expected.
Income tax rates have been rising elsewhere. In Spain Prime Minister Mariano Rajoy increased the top rate from 45% to 52% (and in some regions it is even higher). In Spain’s case, rates increased across the board so even those in the lower tax brackets are affected, but the increase was much higher for those at the top.
In Portugal the top rate of income tax jumped from 42% to 46.5% last year. Cyprus introduced a new top rate of 35% for income over €60,000. While Cyprus’ tax rates remain comparatively favourable, taxes have been rising here too and there is plenty of room for more if needed.
Most countries tax bank interest separately from general income, and Spain, France, Portugal and Cyprus have all increased taxation on bank interest over the last year or so. Other investment income, such as dividends and capital gains, has also been hit.
Various countries have also imposed some sort of “solidarity tax” for top earners, as an emergency measure to collect more revenue.
Last year Portugal announced a 3.5% “extraordinary tax” on all personal income over €6,700 received in 2011. This year it introduced a 2.5% surcharge on income exceeding €153,300, thereby taking the top rate of income tax up to 49%.
France imposed a 4% “exceptional contribution” tax on incomes over €500,000, and taxpayers in Cyprus are paying a “special contribution” of up to 3.5% on earnings this year and next.
And then there are wealth taxes.
In France, former President Nicolas Sarkozy reduced the burden for French households towards the end of his term in office, but M. Hollande very quickly overturned this and, for this year at least, wealth tax burdens are particularly high.
In Spain it has been a case of now you see it; now you don’t; now you do. The unpopular tax was effectively abolished in 2008 only to be reinstated just three years later for 2011 and 2012. There is a strong possibility it will have to apply for 2013 as well.
Could other troubled Eurozone countries like Italy, Portugal and Cyprus consider applying some sort of wealth tax to aid their fiscal efforts?
Many of these tax rises are meant to be temporary measures until the respective country reduces its budget deficit to 3%. This is proving harder than expected, so we need to prepare for higher taxes for longer. Spain and Cyprus are also facing the possibility of a bail out, and this would normally mean the country has no choice but to apply more tax hikes.
There has always been debate about the effects of taxing the wealthy. On the one hand some analysts argue that lower tax burdens encourage investment and growth while higher taxes could make wealthier citizens leave the country.
On the other hand, many countries around the world impose tax at higher levels than countries like the US and UK, and yet achieve similar rates of growth. The Washington based Center for Economic and Policy Research points out that the US economy grew very swiftly in the 1950s and 1960s when “top rates of tax were draconian by current standards”.
The debate is likely to go on and on, but for taxpayers in the Eurozone it may turn out to be purely academic. The simple fact is that in these tough fiscal times governments need more cash, and so may have little choice in the matter.
For advice on protecting your wealth from taxation speak to a wealth management firm like Blevins Franks, which has decades of experience advising British expatriates in Spain, France, Portugal, Cyprus and Malta on their tax planning and takes the UK rules into consideration as well as the local ones.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
14th September 2012