How governments in Asia steal less than their American, European & Australian counterparts
To help explain why, I’ve compared income tax rates between the regions very generally, as it represents the biggest expense for most people to their government. Second, I also account for total government tax revenues as a percentage of GDP, as it is a great indicator of the overall scope and size of government.
Income Tax Rates Compared
With progressive income tax rates that quickly race up to the range of 35-50 percent, Europe falls short on this criterion straight off the blocks.
Across the Atlantic pond, American federal and state income taxes combined are rather high to. Yet they don’t rise so quickly and you can make a sizable income, relative to the Europeans, without hitting the top marginal rate.
At the same time, 70% of the federal income tax take are paid by the richest 10%. So if you plan on eking out a meager living as an ascetic monk, America may not be so bad after all. However, for goodwill’s sake, I’ll assume you’re a hard working individual who seek a respectable standard of living.
With a marginal federal tax rate for a single working individual of 28% for income up to $178.000 and total tax revenues (Federal + State) of no more than 26% of GDP, America is more libertarian than Europe, yet no haven on this criterion.
Australia to has relatively low income tax rates according to Western standards, albeit a bewildering array of other forms of taxation. Still, Australia’s total tax intake stands at 31% of GDP. With a tax-free personal income allowance of up to AUD $18,000 and a marginal rate of no more than 30% of earned income up to $180 000, Australia, like America, scores relatively well amongst G-20 economies, yet can’t compete with our last contender.
Asia’s Low Tax Rates Prowess
When it comes not just to personal income tax rates, but total tax burdens, many East Asian countries score extremely well. Income taxes are very low, especially at the middle class end of the pay scale.
Total tax revenues to GDP are also shockingly low. Even in rich Singapore with a per capita GDP of USD $59,900 at PPP, the state took in no more than 13,7% of national GDP in tax revenues. That’s half the American rate when Federal and State taxes are combined!
In Theory Good, in Practice Great
Yet, even though the official rates look enticing the actual real life experience is even better in many Asian countries. How? First, the cost of living in East Asia is considerably less than in Western Countries. Second, what the official tax rats are, and what individuals actually pay, are two completely different things.
Take Thailand (or China, Indonesia & Malaysia where circumstances are very similar) where income up to 4 Million Baht (roughly $120 000 USD) is taxed at 30%. That’s $60 000 less than you’re allowed to earn in Australia or USA before you hit a higher tax bracket.
Yet this seemingly high rate cloaks one important fact, the difference in the cost of living. 4 Million Baht is a huge sum and you’d live like a king on about 25% of this. For income up to 1 million the highest marginal tax rate is 20%. So on official tax rates Thailand scores rather well when you take into account the low cost of living (measuring at PPP).
Compared with Western Europe, the cost of living can run as low as 1/5th. Compared with America I’ll roughly estimate living expenses run at about 1/3rd
In other word’s you don’t need to earn $70 000 per year to have no financial worries. You’d be perfectly well off earning only $20 000, in which case you’d be taxed cumulatively at around 10% of total earnings.
Second, there’s the issue of what you actually pay. If you’re a business owner the scope for cheating on your taxes are enormous (as they may also be in the West). With 65 Million people and a state, which takes in only 17% of GDP in tax revenues (compared to 44% in France), ensuring full compliance with the tax code is beyond the scope of the Thai government bureaucracy.
Reap What You Sow
It’s not uncommon to meet business owners running companies with over a dozen employees and revenues in the Millions of Baht per month, who pay no business or income tax what so ever. Their employees, who can make anything from USD 1-3k per month also pay 0% income tax.
The same goes for the hundreds of thousands of people whose occupation is taxi or motorbike driver and the tens of thousands of street vendors or mom and pop storeowners who pay absolutely 0% in income taxes.
Now going under the radar as a foreigner owning a business or working in Asia may prove a bit more cumbersome, yet it’s not impossible.
The conventional way around the authorities in this matter is by running everything in the name of a local, for example a good friend or your spouse. This option is of course fraught with dangers, for one your business isn’t in your name, but no one said paying 0% income tax would be as easy as 1 -2 -3.
All in all, whether you choose to pay the low rates that apply in most East Asian countries, which still gives you plenty to live on, or work around them, you’re going to be left with a higher percentage of your original income once the taxman has had his cut. I therefore rank East Asia as offering a more Libertarian lifestyle than USA, Europe and Australia as far as income taxes are concerned.