Cash-strapped nations raise heat on rich

The issue of higher taxes for top earners is creeping on to the political agenda as the deepening recession increases popular pressure for the rich to shoulder a bigger share of the burden.

When the UK announced a 50 per cent tax rate in last month’s Budget, it was following a lead set by the US and Ireland. Some politicians in France, Germany and Australia are also mulling whether to ask the rich to pay more.

In France, demands for a lifting of the bouclier fiscal – the 50 per cent ceiling on total taxes paid by any taxpayer – are being heard on all sides of the political debate. Last week Alain Juppé, former French prime minister and member of the ruling UMP party, called for changes as a “signal” of fairness and justice.

So far Nicolas Sarkozy, the president, has vigorously defended the ceiling, insisting he was not elected to raise taxes. But he will come under ever greater pressure to make concessions of some kind if the economy continues to deteriorate.

In Germany the Social Democratic party has made a 2 percentage point tax rise for the rich – to 47 per cent – a central plank of its campaign strategy ahead of September’s elections. “In the crisis we have to ask those with strong shoulders to bear more,” said Frank-Walter Steinmeier, foreign minister, as he launched the party’s campaign last month.

But many governments remain sceptical about the economic benefits of raising top tax rates. They fear higher rates could encourage skilled professionals and the wealthy to flee to lower-tax jurisdictions, encourage avoidance and diminish work incentives.

Raising taxes on the rich is also a reversal of a trend entrenched since the mid-1980s, when, as tax competition intensified around the world, top marginal rates were slashed.

So far only a few countries have made a move to raise taxes – not least because the priority in recent months has been to create fiscal stimuli. But in an emergency budget in April, Ireland announced across-the-board rises, although the rich faced the heaviest burden. Brian Lenihan, finance minister, said: “Those who can best afford it will pay most.”

In Denmark, with a high-tax regime, the government proposed cutting the top rate by 1.5 per cent in February, although in the end it left the rate unchanged and removed people from the top bracket by raising the threshold.

Some of the countries hardest hit by the economic crisis – such as Hungary, Latvia and Lithuania – have cut income tax rates, but raised value added tax.

The trend towards low, flat rates of income tax in the Baltic states and central and eastern Europe is likely to continue, reflecting the particular intensity of tax competition in these regions. But there is political tension over the perceived unfairness of the flat tax system in some countries, highlighted in March when the Czech minority centre-right government lost a vote of confidence.

Even in Switzerland, one of the favourite destinations of tax exiles, there is some unease over tax privileges for the rich. In February Zurich voted to cancel its forfait arrangement – a lump sum tax system for some foreigners – although other cantons look unlikely to follow the move.

Indeed, the appeal of Switzerland is one of the biggest worries for European governments considering raising their top tax rates.

David Kilshaw of KPMG, the professional services group, says there is a trend for high tax countries to follow each other in raising the top rates.

“But if countries like Switzerland are able to attract business, the question is how far will this go?”