Commentary

In an environment where unemployment is higher, and overall consumer confidence is lower, than they have been in decades, many countries are introducing tax measures to support the individual taxpayer. In fact, as an OECD average, the monetary impact of tax measures tied to individual taxes outweigh those tied to business taxes by more than a three to one margin. The general goal of these measures is to increase after-tax pay and, by extension, overall demand. There is some question regarding the overall effectiveness of these efforts, though, in terms of stimulus. For instance, one recent study in the United States1 showed that during periods of low confidence, larger proportions of tax refunds go to savings and repaying debt rather than spending.
In all, 12 of the 24 countries we reviewed have taken some action related to personal income taxes. In this area, we may be seeing the widest variety of actions, but the most common approach has been to expand the range of deductible items. Reducing tax rates for lower-income taxpayers has been another common measure. Other approaches have included reducing individuals’ social security contributions and enacting special credit/rebate programs.

Countries taking actions related to personal income
taxes

• Argentina
• Australia
• Brazil
• The Czech Republic
• Hungary
• Ireland
• Russia
• South Korea
• Switzerland
• Taiwan
• United States

Highlights

• The most common activity has been to expand the range of deductible items, with Argentina, Russia, Switzerland and Taiwan among the countries that have sought to reduce the income tax burden in this way. For example, in Russia, the maximum deduction available for expenditures associated with the new construction or acquisition of housing has been increased. In Switzerland, a higher tax deduction for families has been instituted. For countries that are already struggling with growing deficits, this approach may be easier to implement than refundable credit/ rebate programs.
• Reducing rates has been another frequent approach, with South Korea and Taiwan among those who have either lowered rates directly or adjusted their rate brackets to allow more taxpayers to be subject to lower tax rates. Brazil has adopted the introduction of intermediary rates as a relief for lower-and middle-income taxpayers. At the same time, it announced a significant increase in its VAT, Hungary announced a series of personal income tax rate reductions, indicating that it is moving toward the OECD-recommended focus on taxing consumption more heavily.
• One of the most prominent campaign and early agenda items for US President Obama was a refundable tax credit for working individuals and families — dubbed the Making Work Pay credit. Now passed, this credit is an important part of the United States’ fiscal stimulus effort. One unique aspect of the credit is that it will be delivered by employers through a reduction in withholding for federal income tax, which means that individuals will begin to see the benefits of the new credit sooner.
• With its budget announcement in April, the United Kingdom presented a series of significant income tax increases geared toward high earners, signalling an increased focus on reducing their budget deficit. These included the withdrawal of personal allowance reliefs for those earning more than £100,000, a new 50% top rate of income tax for those earning £150,000 and up and the gradual restriction of tax relief for pension contributions for high earners.
• In Ireland, marginal income tax rates have increased by up to 8.5% as compared to 2008, as a result of a combination of increases in both the income levy and health levy. Pension contributions are also restricted for 2009.

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