Personal Income Tax
Many Member States have implemented what are, in some cases, substantial changes to personal income tax during 2010 and 2011. The current economic situation has resulted in marked differences across Member States as regards the direction of these tax changes.
Several Member States have lowered personal income taxes (Bulgaria, Denmark, Finland, Germany, Hungary, Lithuania, the Netherlands and Sweden), as has indeed been the trend across the EU during the last decade. However, a larger number of countries (Czech Republic, Estonia, Ireland, France, Greece, Latvia, Luxembourg, Portugal, Romania, Slovakia, Spain and the United Kingdom) raised personal income taxes, although on a more varied scale and often by means of changes to the tax base. In Denmark, personal income taxes were somewhat increased in 2011, following the reform which lowered them in 2010. For Member States which have room to manoeuvre in shifting the tax burden away from personal income tax, most tax reforms have been aimed at increasing work incentives. The focus has been partly on participation incentives and partly on incentives to work extra hours along the intensive margin. A notable shift away from personal income tax to other sources of taxation has taken place in Denmark, Finland, Germany and Hungary.
The progressive nature of the personal income tax system has been enhanced in several Member States. France increased the highest marginal tax rates as well as tax rates on capital income. Spain introduced two additional top personal income tax brackets of 46 % and 47 %, and increased tax rates on capital income from savings in 2010. In the United Kingdom, personal income tax has been made more progressive, with higher tax allowances and an additional top rate of 50 % — 10 percentage points higher than the previous
maximum. (28) Greece and Portugal both
introduced a new 45 %-top rate in addition to the previous top rates of 40 % and 42 %, respectively. Latvia increased the top rate in 2010 and
Luxembourg did likewise in 2011.(29) In Ireland a
combination of measures to personal income tax and social security contributions means the top marginal rate has increased to 52 % for employees and 55 % for the self-employed and applies from a lower threshold. Lastly, Germany increased allowances (basic allowance and allowance for
(28) Furthermore, the United Kingdom has introduced an
income ceiling of £ 100 000 for receiving the basic allowance from April 2011.
(29) Latvia increased the top rate from 23 % to 26 % in 2010 but
lowered the rate slightly to 25 % in 2011.
children) and improved the deductibility of social security contributions.
Only in two Member States has there been a change towards less progressive personal income tax schedules, in 2010 and 2011, with the introduction of a flat tax regime (Hungary) and a marked reduction in the top statutory income tax rate (Denmark). The Hungarian flat tax reform in 2011 brought the highest marginal tax rate down from 32 % (36 % in 2009) to the 16 % flat rate, whereas in Denmark, the 2010 reform lowered the highest marginal tax rate from 63.0 % to 56.1 %. This overall tendency towards a steeper progression in personal income tax might reflect the fact that personal income tax is the only tax that is well suited to redistribute consumption possibilities among different income groups, whereas other taxes which increased in response to the need for consolidation tend to be flat or even regressive.
In 2010, for the first time in several years, the EU- 27 average top personal income tax rate rose, but decreased again slightly in 2011, mainly as a result of the Hungarian reform. Table A1.4 in Annex 1 presents the statutory top personal income tax rates since 1995.
In Austria, a dual income tax system was implemented in 2011, taxing capital gains of financial assets — together with income from interests, dividends, etc. — by a withholding tax of 25 % independent of the holding period. Also, Portugal introduced a new flat tax on capital gains, which are now also taxed independently of the holding period, and Romania broadened the personal income tax base to include incomes from capital gains and interests on bank deposits. Several countries also introduced measures to broaden the tax base, often by reducing tax expenditure items. In Denmark, the reduction of statutory rates was partly financed by a broadening of the personal income tax base itself through reductions in the deductibility of work related expenses and interest payments. France replaced the tax deductibility of mortgage interest payments with more targeted subsidised loan schemes in 2010. In Spain, the housing investment deduction in personal income tax was removed for incomes above € 24 170.2 in order to reduce the bias towards investment in owner occupied housing. In
the Netherlands, a new top bracket was introduced in the imputed income for owner-occupied housing, increasing the imputed income for the part of the value in excess of € 1 million from 0.55 % in 2009 to 1.05 % in 2011, bringing it closer to the 4 % imputed income that applies to other assets. Significant broadening of the personal income tax base was also seen in Latvia. In Italy, a lower proportional tax rate of between 19-21 % was introduced on rental income from buildings for residential purposes, replacing the inclusion of 85 % of the rental income in the personal income tax base (with a marginal tax rate of around 30 % on average).
Corporate Income Tax
The strong tendency towards lowering the statutory tax rates across the EU has continued, albeit at a slower pace, as most Member States have left corporate income tax rates broadly unchanged.
However, some Member States have made substantial changes. The majority of reforms have led to a decrease in corporate income taxation. Reductions of the statutory rate have taken place as follows in 2010-2011: Hungary introduced a lower rate of 10 %, applicable up to HUF 250 million of the tax base in 2011, which will gradually become the top statutory rate from 2013 (replacing the current 19 %-rate); Lithuania cut the rate to 15 % in 2010 after having increased it from 15 % to 20 % in 2009. The United Kingdom reduced both corporate income tax rates by 1 percentage point to 27 % and 20 % respectively, and announced a further decrease in the standard rate by 1 percentage point per year until it reaches 24 %; in Greece, the statutory rate is reduced from 25 % in 2009, to 24 % in 2010 and to 20 % for income earned as of 2011. Greece introduced a temporary special contribution for enterprises with a net income above € 100 000 in 2009 and beyond. Portugal was the only country to increase the statutory corporate income tax rate, introducing an additional state corporate income tax (IRC) of 2.5 % on taxable profits exceeding € 2 million. Table A1.4 in Annex 1 provides an overview of the statutory top corporate income tax rates in 2011 compared to previous years.
Some Member States which reduced the tax burden on corporate profits did so by narrowing
the tax base rather than reducing general tax rates (or both, as in the case of Lithuania and the Netherlands). In Germany, the corporate income tax base was reduced by means of a (temporary) increase in depreciation allowances, which has the same economic effect on the marginal tax rate on investment as a decrease in the statutory rate. Other countries introduced special credits for R&D investment (Belgium) or a reduction in taxable profits for firms carrying out investments in certain assets (Lithuania).
In France, the local business tax (taxe professionnelle) has been replaced by a new ‘economic territorial contribution’ (contribution économique territoriale) as of 2010. The tax is no longer based on the annual value of commercial and industrial equipment, but on the annual rental value of immovable property (cotisation locale d’activité). The tax also consists of a new tax of 1.5 % on the added value of the business which applies to taxpayers with a turnover exceeding € 152 500 and allowances depending on the amount of turnover (cotisation complémentaire).
Over the last decade or so, the broadening of the corporate income tax base and reduction of tax expenditures has often been one of the sources of financing the general reduction of the statutory corporate income tax rates seen across the EU. However, this has not been the case in 2010 and 2011. On the contrary, several Member States have also introduced new special tax provisions favouring particular sectors. France, Spain and the Netherlands have expanded preferential tax schemes for small and medium sized enterprises (SMEs). For a discussion on the effect of reduced corporate tax rates for small and medium sized enterprises, see sub-section 2.1 in Chapter 5.