From a report done by KPMG that came out last week, comes the following chart on "the highest effective personal tax rates in the world": (click to enlarge)
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| Source: KPMG |
The chart shows only the top 40 countries with high income tax rates. The US is 55th on the list, while the UK made it in the top 40 (it's 37th). Click here to see the rest of the rankings.
Let's focus only on the international competitiveness side of the story, setting aside the fact that high income tax rates demotivate successful and talented individuals from staying in the country (yes, by talent I also imply acting and the case of Gerard Depardieu).
When talking about international competitiveness income tax rates also play an important role, sometimes even more important than corporate tax rates. I'm particularly happy with this graph as it included employee social security rates to calculate the overall burden, which are often overlooked but still play an important decision-making factor in determining total labour costs for a business (i.e. for an investor).
It's justifiable to have high tax rates in highly efficient and institutionally strong countries like Denmark, Germany or Sweden, since they have other factors that attract capital, investments and motivated individuals into these countries. I'm not saying lower taxes wouldn't help them further increase their competitiveness (as they did in Sweden), but their size of government is somewhat justified by its efficiency in providing public goods and not expropriating wealth. These are the two essential functions of the government anyway, so as long as investors and individuals perceive a stable institutional environment where their wealth won't be diminished by bureaucrats, corruption or similar factors, I guess they would be willing to accept higher taxes.
For countries like Greece or Croatia (or similar countries you may find interesting on the list) this certainly isn't the case. Their states are seriously inefficient in providing public goods or in attracting investors via institutional stability, so their emphasis must be either on changing this serial inefficiency of the government from within (via a public sector reform) or through lowering the overall tax burden thereby making itself more competitive on the international market. This implies a labour market reform, and a reform of the entitlement system, or else the countries could face serious budget deficit problems in the short run. But keeping high income tax rates, and a high overall tax burden in the situation where their economies are undergoing a 6-year long depression, is absurd. No matter what the rating agencies say on how to misuse austerity and how to close the budget deficit with tax hikes, continuing with this policy for too long will not only destroy the country in the short run, it will completely shatter its outlook in the long run by causing a brain drain and resource depletion.
The no.1 on the list, Belgium, is a case study by itself. Have in mind that this country didn't even have a government for a year and half. It's economic and tax policies should be observed through the lens of a possible separation and the consequential variety of interest groups who need to be satisfied.