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How Much Of Your Income Do You Lose In Tax?

Article published in the Telegraph on June 21, 2011.

If you ever had the feeling that you spent half your working life just to pay tax you’re probably not far wrong. What with income tax, national insurance/social security, capital gains tax, VAT, council tax, excise duties etc, a considerable amount of your hard earned income is lost in tax each year. If you’re lucky enough to be retired you’re still faced with tax on your pensions, savings and investments, not to mention the amount we pay in VAT each year.

The Institut Economique Molinari carries out a study each year on The Tax Burden of Typical Workers in the EU 27 and determines their “tax freedom day”. It aims to “shed light on the working individual’s role in financing their state and social security”.

Tax freedom day is the day each year when you finally stop working to pay tax to the government and start earning money for yourself.

The country with the latest tax freedom day this year is Belgium, where they have to work right up to 4th August simply to earn enough to pay taxes. Hungary is in second place at 29th July and France takes third place honours at 26th July, which is the same as last year.

Italy’s tax freedom day falls on 1st July, (13 days more than 2010); Portugal’s is 29th May (one day earlier); Spain’s 19th May (three days later) and the UK’s 17th May (4 days later). Maltese workers have to work 9 more days than they did last year, but at 16th April this is still the second earliest tax freedom day in Europe. Cyprus has the earliest day at just 13th March.

The report concludes that tax rises are on the rise across Europe, though they are largely invisible.

Across the EU as a whole, the non-working population currently makes up 54.3% of the population, while “tax-wise, working people must carry most of the weight – a weight that will grow heavier as populations grow even older”.

Countries which use a flat tax policy have offered considerable relief to workers, even though their social security rates are higher. In Hungary a new 16% tax rate pushed the tax freedom day forward by nine days.

Proponents of a flat tax system claim that it leads to less tax evasion and the report agrees. The simplicity of the flat tax system facilitates compliance and the low “not-worth-the-crime” rates encourage many underground dealers to become legitimate businesses. Countries which apply a flat tax have therefore been successful at increasing overall tax revenue at the same time as providing tax relief to workers.

In its calculations, the Institut Economique Molinari looks at income tax, social security contributions and VAT. In the UK the Adam Smith Institute carries out a separate study on the UK tax burden. It uses different methodology which includes indirect and local taxes and it calculates the UK’s tax freedom day as 30th May this year.

Britons therefore worked 149 days to pay their taxes, something the Institute describes as a “shocking length of time”. This was three days more than last year, the difference attributed to the fact that the government had to increase VAT to help reduce the deficit.

ASI calculations also reveal the “worrying extent of the UK’s debt”. UK taxpayers would need to work for 525 days to pay off the national debt – this is with their entire pay package going to the government and none of it being spent on public services.

The Head of Research at the ASI, Sam Bowman, said: “Tax Freedom Day underlines the huge burden of government on working people’s lives. For five months of the year, we are slaves to the state. No wonder growth is so slow – we need robust tax reform now, bringing lower, simpler, flatter taxes.”

In the current climate, however, this is probably wishful thinking and other studies also report on tax burdens increasing around the world.

The Organisation for Economic Co-Operation and Development (OECD)’s Taxing Wages publication, released in May, found that the average tax burden rose in 22 out of its 34 member countries in 2010, a reversal of a trend towards declining tax burdens seen in previous years. France, Belgium, Germany and Italy are among the highest tax countries.

In June, UK accountancy firm UHY Hacker Young surveyed tax burdens in 19 countries across its network, which includes emerging economies. It looked at both low and high earners and found that low earners have the highest tax burden in Germany, followed by India, France and then Italy. The UK fell in 7th place and Spain in 14th. When it comes to higher earners, Italy came top of the list with France in 6th place, the UK in 7th and Spain in 8th. Dubai was lowest in both cases.

These are taxing times for taxpayers, and not just for workers as retirees are also faced with higher taxes. In many cases, however, there are still steps you can take to lighten your tax burden. While we all have to pay our share of taxes, you won’t want to pay more than you have to. In the UK, for example, it is calculated that Britons will pay £13.5 billion in unnecessary tax this year. If you don’t want that to happen to you, ask Telegraph Expatriate Wealth Service for information on legitimate tax mitigation opportunities for your country of residence or the country you are planning to move to.

L’Institut économique Molinari

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