Despite the fact that international tax systems have a variety of distinctive features amongst developed and undeveloped countries, a common feature is that variation in tax rates can regulate both the economy and its social welfare.
Lower personal income tax rates and different thresholds are seen as a means of imposing a greater burden of revenue raising from those who can afford this burden. Lower corporate tax rates for small companies is a means of encouraging entrepreneurial growth, although the relevance of this can sometimes be in doubt.
In the 1980’s, France had varying rates of VAT on luxuries compared to standard products, again as a means of raising revenue from those who could best afford it, and now in the UK, varying rates of stamp duty land tax are imposed on the acquisition of real estate depending upon its value and the relevant applicable thresholds.
It struck me therefore as odd that social security costs of employment have standard rates almost universally. In truth, calling such tax ‘Social Security’ or ‘National Insurance’ is in my opinion a misnomer; let’s call a spade a spade and acknowledge that this is just a tax on employment, however it is dressed up, and it is not specific to social expenditure for which it may originally have been devised. It may therefore be adjusted to suit the political ambitions of a particular country’s government.
For example, Hong Kong does not require employers or employees to pay social security taxes with only a rudimentary system requiring 5% of an employee’s monthly salary to be paid to a Mandatory Provident Fund. Hong Kong income taxes are also low, since a large share of their revenues comes from stamp duties, property transfer taxes and land premiums charged to developers. Singapore does have a 16% social security tax paid by the employer and a 20% tax paid by the employee, but this is only payable to a cap of £30,000 per annum with expatriates being exempt from such charges. And with the highest personal tax rate of 20%, it is not surprising that employment in both Hong Kong and Singapore is at such a high level. Contrast this with employment in countries such as Italy, France and Spain. Social Security in Italy is equal to 31.5% for the employer and 9.4% for the employee with personal tax rates at a maximum of 43% plus regional taxes. In Spain, the employer’s contributions amount to 31.05% of gross salary with employees paying 6.62%, but again the top marginal income tax rate is currently 52% with even higher rates in places like Catalonia. And in France, the situation is even more dire with employer contributions amounting to 25%-42% of gross salary, employee contributions amounting to 22% and a top marginal income tax of 45% with surcharges creating the possibility to maximise tax on employees (income tax and social contributions) at 75%. Hardly an incentive for employment.
Limiting the comparisons to just these 5 countries, records show unemployment levels in Hong Kong and Singapore of just 3.3% and 1.9% respectively, compared to unemployment levels in France, Italy and Spain of 10.7%, 11.1% and 26.2% respectively.
In nearly all countries reviewed by me, social security taxes are at a fixed amount irrespective of earnings. It would seem to me fairer if varying rates of Social Security charges were imposed according to (a) the size of the company and the number of employees and (b) the remuneration paid to these employees. The combination of relatively small companies and correspondingly manageable salaries would create a lower burden for both employers and employees, yet create the employment necessary to generate growth. Conversely, established companies and those paying high levels of remuneration to top management would bear social security taxes at a much higher rate in order to generate the tax revenue required for social welfare. For example, instead of a 13.8% employers’ national insurance charge for large companies in the UK, those on the highest levels of salary might incur a burden for their employer company of, for example, 25% of their salary as exists in many of our EU member States (Belgium 32.5%, Portugal 23.45% and Germany 21.3%). Indeed, this could be a way of restricting both salaries and high bonuses paid to top management of multi-national companies.
Such a policy would have been welcome to Michael Marks and Thomas Spencer when they founded M&S in 1884, or perhaps James Barclay when he joined a couple of Goldsmith bankers in London in 1736. New entrepreneurially driven ventures need tax breaks to create the green shoot recovery the world needs, and a tax on employment, if levied at varying rates, can be sufficiently revenue producing yet incentivising for such companies. In the same vein, estate tax and inheritance tax at a single rate also appears to be unfair to those whose capital will be severely depleted in a struggle to meet the tax bill. Many who inherit capital only slightly above the relevant threshold, yet pay the same rates of inheritance tax, find that they have to sell the assets comprised in the capital, particularly the residential home. Others where the capital is significant within the relevant estate, are more easily able to pay the estate or inheritance tax due. Again, varying the thresholds and rates would help create fairness within the tax system.
Governments of most countries state that their system of taxation should be both fair and simple; clearly neither is the appropriate adjective for most of the developed countries in the world. Most people, including those in government, would probably agree that the entire system needs an overhaul in order to create fairness and simplicity, yet the motivation to do so within a limited tenure of office for most politicians is lacking. It is for the international business community, both entrepreneurs and large multinational groups, to band together with their professional advisors in an attempt to persuade governments around the world that fairness and simplicity will bring back global growth as well as the tax revenue required to meet the increasing demands of social welfare in developed countries.