The tax cost of success
March 22, 2020
The tax cost of success
By Fernando Rivera, CPA
Taxes are a State imposition over the resulting gains of our efforts and the income source that governments utilize to perform their social justice work and promote economic development. If ten percent of the people own ninety percent of the riches, according to Kiyosaki, well then most of the taxes should come from there. But governments should be cautious, fair, and creative, without penalizing success, and continue promoting it. Overall, to adapt to these times that human labor is being replaced by technology, transitioning workforce to entrepreneurship or business owners.
If governments do not balance the tax costs of success fairly and reasonably, it could encourage tax evasion, affect career selection and could be promoting migration, and wealth and successful human capital flight. This type of human capital flight is harmful for any economy because they are the ones that create employment, their taxes contributions are proportionally higher without receiving any governmental assistance and/or they serve vital functions.
In order to stay competitive and keep those income-economy producers from moving to other more “cost-beneficial” jurisdictions, countries must oversee the return on investment of these professionals or investors, create competitive legal structures of doing business and offer tax incentives. In other worlds, where is the place in which my return on investment is higher in a shorter length of time? Whether it is an investment in College, business or other type of investment.
Elements to consider are revenues, college career costs, business or other type of investment cost, operating costs, cost of life, inflation, and taxes costs, among others. The qualitative part of the equation, like for example quality of life, although very important, is not included because it is relative to how an individual or the collective feels about the way a government utilizes and distributes the collected taxes. As to tax cost, to intent equate contributions to society as per income proportions, taxes in many countries, including PR and United States, are imposed in terms of marginal rates or staggered. In which taxable income is divided in segments, and as the segment increases the greater is the marginal tax rate applicable to that segment. That way, while more taxable income a person has the greater is his/her tax proportion to the internal revenue and a social-economic balance is established. In general, it is important to know the local tax costs but also that of other jurisdictions; and for the governments, to position, plan and compete to attract, develop and retain capital and riches. And therefore, achieve economic growth and solidity.
By Fernando Rivera, CPA
Be smart, plan…
Following, you will see the marginal tax costs (as defined below) for 41 countries and other related facts, as per report from “Taxing High Incomes: A comparison of 41 countries”, from Tax Foundation, a non-profit tax policy research group, by Jacob Lundberg and Gustav Fritzon, dated October 23, 2019. In this report they compared the rate at which 41 countries tax their top earners. And according to my extra-official estimate, PR could be in the 30 to 33 position, if it had been included.
The findings concluded that Nordic and Western European countries have the highest effective tax rates of all the countries reviewed, as per report.
According to the report’s authors, “the political discussion around taxing high-earners usually revolves around the income tax, but in order to get a complete picture of the tax burden high-income earners face, it is important to consider effective marginal tax rates.”
- This report compares top effective marginal tax rates on labour income in 41 OECD and EU countries.
- The top effective marginal tax rate is the total tax paid on the last dollar earned by a high-earning worker, taking social security contributions and consumption taxes into account in addition to income taxes. It is a measure of the degree of progressiveness and redistribution in the tax system. As such, it is of great policy interest.
- The highest marginal tax rate is found in Sweden, 76 percent, and the lowest in Bulgaria, 29 percent.
- In general, the Nordic and the Western European countries have the highest effective tax rates.
- Governments differ in the type of taxes they levy (see Table 1 below). All countries in the sample have a central income tax and some sort of consumption tax (state sales taxes in the United States and VAT in all other countries), but apart from that, they do not have much in common in how they tax high-income earners. Eleven countries impose local or regional income taxes and 12 have solidarity contributions or similar surtaxes on high incomes. Twenty-three levy uncapped social security contributions on employees and 26 on employers.
This underscores the need to consider the full spectrum of taxes when comparing marginal tax burdens across countries. For example, Hungary has a flat income tax of 15 percent while the United States has a progressive federal income tax with a top marginal tax rate of 37 percent. As payroll and consumption taxes are low in the United States, the effective marginal tax rate is not much higher, at 47 percent. In Hungary, on the other hand, substantial social security contributions are paid by both employers and employees. In addition, the country has the world’s highest VAT. The result is an effective tax rate of 57 percent—13 places higher than the United States in the country rankings.
See Table 1 below.
OECD – The organization for Economic Co-operation and Development is a group of 34 member countries that discuss and develop economic and social policy. OECD member are democratic countries that support free market economics.
EU – European Union is a political and economic union of 27 member states that are located primarily in Europe.
Source: https://taxfoundation.org/taxing-high-income-2019/
