Wealthy Europeans as well as high-profit companies may have to start paying higher taxes. Politicians, business people, and financial experts stress that the budget deficits are becoming too high in European countries.
European economies face serious problems because the opportunities for covering budget deficits with the help of traditional loans are becoming smaller. First, the interest rates are growing higher and second, taking loans will lead to accelerated inflation, which will make the loans even more expensive.
Budget deficits in European economies
Due to the coronavirus pandemic, the aggregate deficit in the Euro Zone as well as in the EU was considerably higher in 2020 than it was in 2019. It grew from 0.6% to 7.2% of the GDP in the Euro Zone and from 0.5% to 6.9% in the EU. The highest budget deficits were in Spain (-11%), Malta (-10.1%), Greece (-9.7%), Italy (-9.5%), and Belgium (-9.4%). While the aggregate budget deficit in the 19 Euro Zone countries was close to 1 trillion euros in 2020, now it can reach 2 trillion due to the fall in the exports of energy resources from Russia. The deficit may reach 11.5% to 16.2% of the GDP, according to the estimates.
At the end of 2021, the EU budget deficit was $796 billion (4.7% of the GDP) and the state debt was $15.055 trillion (88% of GDP), according to the IMF data. Of all EU countries, the highest budget deficits were in France ($207 billion, 7% of GDP), Germany ($157 billion, 3.7% of GDP), and Italy ($152 billion, 7.2% of GDP).
A high deficit is not a big problem for the economy if it is a temporary phenomenon. But when it becomes clear that we are dealing with a structural deficit that is not going away by itself, measures need to be taken. One of the most obvious measures is raising the taxes for the rich.
Whose taxes are going to be increased in Europe
Even though tax laws in Europe can be different depending on the country, many European states apply progressive income tax rates. Examples include Germany, France, Spain, Finland, the United Kingdom, Austria, Denmark, the Netherlands, and Switzerland.
In Germany, the income tax is between 0% and 45% depending on the amount of the person’s income. The tax on income below 9,984 euros per year is 0%, on incomes between 9,985 and 58,596 euros the tax is between 14% and 42%. Incomes between 58,596 and 277,825 euros are taxed at 42% and the highest rate of 45% is applied to incomes that exceed 277,825 euros per year.
The situation is similar in France: 0% tax on incomes below 9,964 euros per year, 14% tax on incomes between 9,965 and 27, 519 euros, 30% tax on incomes between 27,519 and 73,779 euros, 41% tax on incomes between 73,780 and 156,224 euros, and the highest tax rate of 45% is applied to incomes that exceed 156,244 euros per year.
The idea of raising taxes for the wealthy is not new for Europe. The current economic situation makes this scenario quite realistic.
The main question is probably who will have to pay taxes at increased rates. What categories of people and business entities are going to be affected by tax increase? In many European countries where taxes are already high (Germany, France, Spain, UK, etc.), the perspectives of tax raises look especially frightening. It must be admitted, however, that there legal methods of tax reduction are available in these and other European countries.
In some countries such as Italy, Spain, Switzerland, and Norway there is a wealth tax in addition to the income tax charged at a progressive rate. In all likelihood, wealthy individuals living in these countries are going to experience even higher fiscal pressure in the near future.
At the same time, there is a high probability that corporate incomes are not going to be taxed at higher rates. This is attributable to the need to support commercial companies in the times of recession. Great Britain, for instance, did not raise the corporate tax (19%) on April 1, 2023 when taxes for wealthy individuals were raised (to be more precise, the intentions to raise taxes for the rich were confirmed). The same tendencies can be found in other European countries too.
Large companies, on the contrary, may face tax increases. In 2020, for instance, a Digital Services Tax (DST) was introduced, which can serve as an indication of an overall tax policy in Europe. There is also a probability that not only international companies will have to pay more in taxes but some large national companies too.
As far as personal incomes are concerned, there is little space for raising the taxes because they are already very high. The governments of European countries are going to be highly cautious about raising personal income taxes: no jurisdiction wants to see wealthy individuals relocate to other places in an attempt to escape high taxes.
Taxes to be raised in Great Britain, Germany, and Spain
Currently, one can expect that taxes for wealthy individuals and large companies are going to be raised soon in Great Britain, Germany, and Spain, according to the experts. The British authorities were considering the opportunity to reduce the minimum income tax from 20% to 19% and to stop applying the highest income tax rate of 45%. However, under public pressure and in view of the falling value of the pound, they had to drop that idea.
Something similar is under consideration in Germany. The local authorities are thinking of raising the amount of nontaxable income as well as the threshold at which the highest tax rate is applied. In this way, they want to support both the poor and the rich. The authors of this suggestion insist that the measure will not bring new benefits to wealthy individuals but simply compensate for the inflation. A bill on compensating the inflation was submitted to the German Parliament on August 10 this year. It proposes increasing the amount of nontaxable income to 10,632 euros per year and increasing the upper income threshold to 61,972 euros.
In Spain, complex measures are going to be taken to raise the fiscal burden for the rich and decrease it for the poor. The authorities are talking about introducing an additional tax on personal wealth, raising the maximum income tax rate, and limiting the opportunities for giant companies to use tax deductions. At the same time, the tax rates will become lower for small businesses and the amount of nontaxable personal income will be increased. On September 29 this year, the Finance Minister Maria Jesus Montero said that the Spanish Government intended to introduce a temporary ‘luxury tax’. Spanish fiscal residents who have personal assets worth 3 to 5 million euros will have to pay 1.7% of their value as a luxury tax. Those who have assets worth 5 to 10 million euros, will pay a 2.1% tax. Those whose assets are worth more than 10 million, will be taxed at 3% to 5%. According to Montero, the temporary tax increase will affect only 23,000 people or 0.1% of all taxpayers in Spain.
The economic situation in Europe has worsened over recent years due to the military conflict on the continent and economic sanctions. One of the most obvious ways to collect more tax money is to increase the taxes for the rich. For this reason, the fiscal measures that have been discussed above should not look surprising.