Cash-strapped govts tap the wealthy with higher income taxes

Spain’s wealthiest should be tapped to help close the euro region’s third-largest budget deficit, Prime Minister Jose Luis Rodriguez Zapatero said on Wednesday.

San Francisco | Trenton: From Athens to Olympia, Washington, governments made poorer by the recession are looking to higher taxes on the rich for cash.

Spain’s wealthiest should be tapped to help close the euro region’s third-largest budget deficit, Prime Minister Jose Luis Rodriguez Zapatero said on Wednesday. The UK has boosted taxes on high earners and French and Swedish politicians are calling for the same. The top US tax rate is set to rise in 2011, while at least 14 states have lifted rates or are considering increases.

“You go where the money is,” said Scott Pattison, executive director of the National Association of State Budget Officers in Washington.

The longest recession since the Great Depression has deprived governments of revenue, opening gaps between what they take in and what they must spend to sustain their economies. Budget deficits in advanced economies have swollen more than eight-fold since 2007 to about 9% of gross domestic product, the International Monetary Fund said.

Shift in Trend

Lifting upper-income levies marks a shift from previous years. Average top-tax rates worldwide dropped 0.3 percentage point in 2009 to 28.9%, capping a seven-year slide, according to KPMG International. That trend may reverse, said Brad Maxwell, a KPMG partner in Zurich who follows global taxes. “Taxing the rich is never an unpopular slogan,” Maxwell said.

US President Barack Obama’s 2011 budget calls for the top tax rate for joint filers earning more than $250,000 a year to return to 39.6% from 35%, the level reached in 2001 under former President George W Bush. Obama’s budget also raises taxes on capital gains and dividends to 20% from 15% for those filers.

The UK Labour government raised the top tax rate to 50% on incomes exceeding £150,000 before its election defeat on May 6. The new coalition government this month said it’s planning an increase in the capital-gains tax.

Taxing the well-off resonates with the millions of workers who have lost jobs, said James Hughes, dean of the Edward J Bloustein School of Planning and Public Policy at Rutgers University in New Brunswick, New Jersey.

Few places are more in need of cash than Greece. On May 2, EU leaders agreed to provide $135 billion of aid after Greece added a 45% tax bracket for incomes of more than e100,000. In Portugal, the government introduced a 45% tax rate on incomes of more than e150,000.

European Followers

More European countries may follow. Spain’s Zapatero said the government will create a new tax on those with “high-economic capacity.” French finance minister Christine Lagarde said May 20 that tax increases on high earnings may have to be considered to cope with a budget shortfall equivalent to 8% of GDP.

Sweden’s three-party opposition alliance, which leads in most polls before parliamentary elections September 19, pledged on May 3 to raise income taxes mainly for top earners.

US states, most of which are required to balance their budgets, are embracing the idea. New Jersey imposed a one-year surcharge on top incomes in 2009. Connecticut, New York, Delaware, Wisconsin and Hawaii also raised rates on high- earners, according to the National Conference of State Legislatures. Six other states considered increases this year, according to the group.

Narrower Constituency

In January, Oregon voters approved increases on households earning more than $250,000 that are forecast to bring the state $727 million. In the state of Washington, which doesn’t have an income tax, a proposed ballot initiative would levy one on individuals earning more than $200,000 a year, or on couples with twice as much. The measure, to finance a cut in property taxes, has won backing from Bill Gates Sr, father of Microsoft’s co- founder and a Washington resident. — Bloomberg

So-called millionaires’ taxes haven’t been universally embraced. Minnesota Governor Tim Pawlenty, a Republican, on May 11 vetoed a bill backed by Democrats to create a new tax bracket for couples earning more than $200,000 annually.

New Jersey Veto

In New Jersey, Republican Governor Chris Christie vetoed an attempt by Democrats to extend the 2009 surcharge for 16,000 residents with incomes of more than $1 million.

Christie said he won’t raise taxes to close a deficit of close to $11 billion. Instead, he has proposed $820 million in cuts to education, lower municipal aid and skipping $3 billion of payments to the pension system. As in Greece, public workers and social-services advocates rallied outside government offices to denounce the governor’s budget plan.

“We don’t have a revenue problem,” Christie said. “We have a spending problem and a size-of-government problem. We have to start saying no.”
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