Tuesday, February 22, 2011

More on why the witholding tax 'solution' is wrong

European countries share tax-related information with each other as a matter of course, under its Savings Tax Directive, which for all its faults does go some way towards helping countries tax their citizens appropriately. A few laggards - Austria and Luxembourg are a case in point inside Europe - have insisted instead on merely subtracting witholding taxes from income earned inside their jurisdiction, but refuse to supply information (and to add insult to injury, they take a cut of the proceeds too).

There are many reasons why information exchange is far superior to witholding taxes - not least because tax evasion isn't the only reason why people hide money. Insider trading, people trafficking, market manipulation, and so on - one can think up endless reasons why people want secrecy.

The EU has issued a consultation document that identifies a further, more subtle reason for preferring transparency, to add to the long list of reasons.
"It could favour high income earners in that the ability to pay potential of taxpayers would not be taken into account."
In other words, tax authorities will put a high income earner in a lower tax bracket, because they won't know how high their income is - and therefore apply a lower tax rate to them. And of course it could lead to other forms of tax planning.

Just a thought to add to the mix. And there's more on this here.


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