Just as every part of the world varies in terms of culture, climate, standards of living, and political systems so too do their tax systems.
Each country has its own unique tax system with opportunities hidden if you know where to look. In high tax countries, governments seek to redistribute some of the wealth by placing progressive tax rates on the wealth as high as 60% in some places in Europe, in an effort to increase equality. The result that follows is often a flight of capital to low-tax countries where the wealthy move their assets overseas to escape the outrageously high tax burden.
Tax rates greatly affect the investment decisions of the wealthy, while states should try and encourage local investment, instead, they have often pursued more aggressive policies alienating the taxpayers they should instead be courting. High-income earners in response simply move their assets, business and life overseas to take advantage of local tax opportunities abroad.
In this article, we will speak about the different tax systems and list several countries that have the highest tax rates in the world.
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Not all tax systems are created equal. Aside from the obvious variations in tax rates, there are also different tax systems that can roughly be broken down into four different categories:
This is the most common type of tax system in the world, and is especially prevalent throughout the Eurozone.
In most cases, you are deemed a resident for tax purposes if you spend more than 183 days a year in a country with a residential tax system. This means you are liable to pay taxes on all your worldwide income in accordance with the tax rates in your country of residence.
This is a friendlier tax system whereby only income which is earned within the geographic boundaries of the country is subject to tax in the said country. In other words, any overseas income is exempt from tax, allowing one to optimise their taxes by living in one of these countries and obtaining their income from an overseas jurisdiction.
Examples of countries with territorial tax systems include Singapore, Hong Kong, Panama, and Malaysia.
As the name implies, these are countries which levy zero personal income taxes whatsoever. The most common examples are traditional tax havens which aim to attract wealthy foreign investment by offering attractive tax regulations, as well as nations which obtain significant national revenue from alternative sources (e.g., the Gulf Nations).
While it might sound highly attractive to relocate to a tax-free country, and it may well be a good option, it is important to understand that very often a country with a territorial tax system will serve just as well, and often make it easier to acquire residency there.
This is an archaic type of tax system which is only found in two nations in the world: the tiny African country of Eritrea and… yup, you guessed it! The United States of America. This type of tax system means that citizens of these countries are liable to pay taxes on all of their worldwide income irrespective of where in the world they reside.
Through the Foreign Earned Income Exclusion Act (FEIE), US citizens who spend less than 30 days a year there are able to exclude some of their foreign-earned income to a limited extent. However, for the most part, it is extremely difficult to escape the clutches of the US tax system without actually renouncing your citizenship.
The high-tax countries that we cover on this list all employ the classical residential-based tax system. It might also be unsurprising to find that 6 out of 8 of the countries are European nations.
Now that we have clarified the main types of tax systems which exist in the world today, it is important to understand how those taxes are actually applied in practice. This is where the distinction between marginal tax rates and average tax rates becomes important.
Most so-called high-tax countries make use of what is known as a progressive tax system. This is a system whereby the tax rate increases incrementally according to the amount of income actually earned, with the lowest income earners sometimes paying as little as zero tax, and the highest income earners paying in excess of 50% in extreme cases.
This involves separating the income earned into distinct “tax-brackets”, with a marginal tax rate applied to each bracket. Above a certain maximum income threshold will incur the highest marginal tax rate.
However, even if your income falls in this highest tax bracket, the overall average tax that you pay will be lower due to the fact that only the portion of your income above this threshold is taxed at the highest marginal rate, while the rest is taxed at progressively lower rates.
In other words, the more you earn the more you are taxed. Your average tax rate that you actually incur will never actually be as high as the highest marginal tax rate, but will tend towards it as your earnings increase.
In this article, we compare the countries with the highest tax rates in the world based on their highest marginal tax rates. This is the rate which is often most relevant for high-income earners, and is also a good overall indicator as to which have the highest average tax rates too.
Note: All of the below-mentioned rates refer specifically to the highest marginal personal income tax bands of each country.
The countries mentioned below are the 8 countries in the world that currently have a top marginal income tax rate of 50% or above.
Sweden regularly tops the list of countries with the highest tax rates in the world. The Swedes must be doing something right, as they have the 7th largest GDP per capita in the world, excellent living standards and a high life expectancy. They are also well-known for having one of the best levels of income equality, meaning that the substantial wealth in the country is also distributed equitably.
However, all this comes at a price. Sweden has the highest income tax rate in the world, with the highest marginal tax rate reaching a whopping 57.2%. Some feel this is a fair price given their advanced welfare system and social security, but it is certainly not the place to live if you want to avoid paying exorbitant taxes.
The second spot also belongs to another high-tax Nordic country, that of Finland. Like Sweden, Finland also has one of the top welfare systems in the world, and provides highly advanced public services to their small population of under 6 million. In addition, they also have a tax rate which nearly matches Sweden’s, topping off at 56.95%.
One of only two non-European nations on this list, Japan has long been known as one of the countries with extremely high taxes. Japan is undoubtedly an extraordinarily successful economic powerhouse, with the third-largest economy in the world after the US and China. Not bad for a country which has now slipped outside of the top 10 in terms of population size (and one of the only countries with negative population growth).
There are many potential factors behind Japan’s economic success, such as their incredible work ethic and overall technological superiority. Japan is certainly a nation with many wealthy citizens, but living there comes with a high tax price tag. Japan’s top marginal tax rate is on par with even the Nordic states, at an incredible 55.95%.
As you might have noticed, high tax rates are the norm in the Nordic region. Denmark comes in at number four, meaning that 3 of the top 4 spots are held by Nordic nations.
Just like Sweden and Finland, they are a highly advanced welfare state whereby all Danish citizens have equal access to the various social services on offer. These services do not come for free, and are primarily paid for with taxpayers money. As such, the highest marginal tax rate in Denmark is 55.8%.
The highly developed German-speaking country of Austria is the 12th richest country in the world in terms of GDP per capita. It also offers high standards of living and provides excellent social welfare to its residents.
All these benefits will cost taxpayers in the form of top marginal tax rates of 55%. In addition, Austria also imposes a social security rate of 18%, bonus payments are taxed at 6%, and capital gains tax is as much as 25%. This makes it one of the most highly taxed nations in the world.
The highly developed industrial nation of Belgium has the highest marginal income tax rate in Western Europe, topping at a rate of 50% as of the 2020 tax year.
Slovenia is one of the smallest countries in Europe, yet it boasts a highly developed economy and is the wealthiest Slavic country in terms of nominal GDP per capita (outperforming both Poland and Russia). It also has extremely high taxes, with a top marginal tax rate equal to Belgium’s 50%.
Israel is the only other non-European nation besides Japan in the top 10 of countries with the highest taxes in the world. Like some of the others on this list, Israel is a small nation that packs a big punch.
With a population size of roughly only 8.5 million people, it is a thriving economic hub for startups and the technology industry. It has recently even become a hotspot for cryptocurrency ICOs, and is leading the way in terms of Blockchain technology adoption. However, if you decide to settle down in Israel, you must be prepared to pay a hefty amount in taxes. It too has a top marginal tax rate of 50%.
Most of the countries which are mentioned on this list of the top 8 countries with the highest taxes in the world are admittedly highly successful economic centres. They all offer their citizens a high standard of living, access to great earnings potential, and an array of high-class social welfare benefits.
That being said, nobody enjoys having to hand over half of their income to the government. Fortunately, there are many other countries out there with lower taxes that offer similar levels of comfort and high standards of living, with significantly lower taxes (and in some cases, none at all). If your aim is to maximise your living standards and at the same time reduce your taxes, you would be best served to find somewhere else in the world that serves you better.
Disclaimer: Offshore Protection strives to keep information on this website updated, however, laws and circumstances are subject to change. All information on this website is for reference purposes only and does not constitute legal or tax advice. Contact Offshore Protection for specific advice regarding your situation.