Part 1 - AL-Tax
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Part 1 - AL-Tax

Part 1 - AL-Tax Part 1 - AL-Tax

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Chapter 11Figure 11.2 shows the shift in tax happiness as income level rises.Flannery (2005) provided some insight about China’s long-term public financeproblem. Although it has a booming economy and relatively cheap labor costs, itshigh payroll taxes put it at a competitive disadvantage. High taxes, rising wages, anda pension funding system that can only get worse will cause China to be increasinglyless competitive as the years pass. Its population is aging and its pension systemis basically a pay as you go system, which means that people who are still workingwill have to pay for the pensions of people who are retired. Local officials whomust find the cash to pay retirees are under pressure to take funds out of individualaccounts, which increases unfunded liabilities. Flannery speculates that it will bemostly the foreign corporations that invest in China that will pay this tax, which isup to 45% of payroll. This rate is higher than even some of the bloated welfare statesin Western Europe.Other Asian countries also face long-term pension funding problems as theirpopulation ages while birth rates decline. One way to reduce the pressure on thepension system is immigration. Allowing a flood of young immigrants into thecountry would increase the pool of people paying into the pension system. However,loosening immigration requirements might cause other problems, depending on thefacts and circumstances.Another way to eliminate the problem would be to privatize the pension system.Privatization would end the redistributive aspects of government-managed pensionfunds as individuals would take responsibility for their own retirement funding.But privatization would not solve the transition problems, since the pensions ofcurrent retirees would still have to be funded.Rank €50,000 Rank €100,000 Rank €200,00050403020100Hong KongTaiwanSingaporeJapanSouth KoreaThailandChinaIndonesiaMalaysiaAustraliaTurkeyIndiaFigure 11.2Shift in tax happiness281

International Taxation Handbook11.6 Index of Economic FreedomAnother way to compare the public finance systems of various countries is tocompare their top marginal individual and corporate income tax rates and theiryear-to-year change in government expenditures as a percentage of GDP. These arethe variables used to compute the fiscal burden scores for 161 countries in the Indexof Economic Freedom (2006), an annual study that is commissioned by the WallStreet Journal and the Heritage Foundation. Each variable in this study was assigneda grade of 1 to 5, where 1 was the lightest burden and 5 was the heaviest burden. Thescores for each of the three individual variables were then weighted to arrive at thefinal score. The corporate income tax was assigned a weight of 50% and the othertwo variables were weighted 25% each.One advantage of the Index of Economic Freedom is that it includes more countriesthan does the Tax Misery Index, 161 versus 56. Another advantage is that itincludes more Asian economies. One disadvantage is that it omits some taxes fromthe burden calculation.Table 11.9 shows the relative fiscal burden for the 12 Asian countries plusselected other countries. Some of the 161 countries in the study could not be rankedbecause of unreliable data. The table is subdivided into quadrants – top quarter,second quarter, third quarter, and lowest quarter.Figure 11.3 shows the relative fiscal burden ranking for the 12 Asian countriesincluded in the present study.Table 11.9Ranking of relative fiscal burden (1 lightest, 5 heaviest)Rank (out of 161) Country ScoreTop quarter (1–40)1 UAE 1.38 Hong Kong 1.89 Romania 1.914 Singapore 2.116 Ireland 2.322 Hungary 2.422 Poland 2.428 Czech Republic 2.528 Russia 2.539 Brazil 2.8(Continued)282

International <strong>Tax</strong>ation Handbook11.6 Index of Economic FreedomAnother way to compare the public finance systems of various countries is tocompare their top marginal individual and corporate income tax rates and theiryear-to-year change in government expenditures as a percentage of GDP. These arethe variables used to compute the fiscal burden scores for 161 countries in the Indexof Economic Freedom (2006), an annual study that is commissioned by the WallStreet Journal and the Heritage Foundation. Each variable in this study was assigneda grade of 1 to 5, where 1 was the lightest burden and 5 was the heaviest burden. Thescores for each of the three individual variables were then weighted to arrive at thefinal score. The corporate income tax was assigned a weight of 50% and the othertwo variables were weighted 25% each.One advantage of the Index of Economic Freedom is that it includes more countriesthan does the <strong>Tax</strong> Misery Index, 161 versus 56. Another advantage is that itincludes more Asian economies. One disadvantage is that it omits some taxes fromthe burden calculation.Table 11.9 shows the relative fiscal burden for the 12 Asian countries plusselected other countries. Some of the 161 countries in the study could not be rankedbecause of unreliable data. The table is subdivided into quadrants – top quarter,second quarter, third quarter, and lowest quarter.Figure 11.3 shows the relative fiscal burden ranking for the 12 Asian countriesincluded in the present study.Table 11.9Ranking of relative fiscal burden (1 lightest, 5 heaviest)Rank (out of 161) Country ScoreTop quarter (1–40)1 UAE 1.38 Hong Kong 1.89 Romania 1.914 Singapore 2.116 Ireland 2.322 Hungary 2.422 Poland 2.428 Czech Republic 2.528 Russia 2.539 Brazil 2.8(Continued)282

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