The second category of the International Tax Competitiveness Index (ITCI) 2025 focuses on Individual Taxes.
Individual taxes include personal income tax as well as social contributions used to finance pension, healthcare, and insurance systems. They remain one of the main sources of government revenue and play a key role in shaping incentives to work, save, and invest.
Top performers in individual taxation:
1. Slovakia
2. Estonia
3. Hungary
4. Greece
5. Turkey
These countries share several common features:
- low personal income tax rates;
- simple and transparent tax systems;
- no additional surtaxes;
- limited non-standard social contributions;
- low or zero taxes on capital gains and dividends.
Lowest-ranked countries: Japan, Poland, Denmark, Ireland, and South Korea.
It is worth noting that Japan operates a hybrid international tax system. Under this system, 95% of foreign-source dividends are exempt from tax, while there are no special reliefs for foreign capital gains. In contrast, many OECD countries have moved to fully territorial tax systems.
The ITCI evaluates individual taxation across three subcategories:
1. Taxes on Ordinary Income
2. Income Tax Complexity
3. Capital Gains and Dividends
1. Taxes on Ordinary Income
In most countries, personal income tax is progressive: tax rates rise as income increases. However, very high top marginal rates reduce incentives to work, raise labor costs, and can limit overall production.
Countries with lower rates and more flexible tax scales face less tax pressure on labor.
In 2025, the highest combined tax burden on labor (including employee social contributions) is observed in:
- Slovenia – 61.1%
- Belgium – 60.2%
- Portugal – 58.2%
By contrast, Estonia applies a flat 20% rate and ranks among the overall leaders in the index. In general, countries at the top of the overall ranking keep personal income tax rates below 40:
- Latvia – 36%
- New Zealand – 39%
Another important factor is the income level at which the top rate applies. When the highest rate starts at relatively low income levels, the system becomes almost flat in practice. Hungary applies a single 15% rate, known as a flat tax system.
Kazakhstan currently also uses a flat personal income tax rate of 10% (excluding employee social contributions). However, from 2026, a differentiated rate structure based on wage levels will be introduced.
The ITCI also measures labor tax neutrality using the marginal-to-average tax wedge ratio. The closer this ratio is to 1, the less distorted incentives are for additional work. In 2025, Hungary shows the best result (1.0), thanks to its flat tax system. The OECD average stands at 1.27.
2. Income Tax Complexity
Tax complexity is assessed by the presence of additional taxes and special social contributions. The more such elements exist, the less transparent the system becomes and the higher the administrative burden.
Additional income-related taxes apply in:
- Germany (a 5.5% surcharge on capital gains, dividends, and personal income tax above EUR 18,130);
- Japan (a 2.1% surtax);
- South Korea and Luxembourg.
In other countries, a significant share of revenue comes from non-standard social contributions:
- Costa Rica – 31.1% of total revenue;
- Mexico – 14.1%;
- Iceland – 8.6%;
- Colombia – 8.3%.
3. Capital Gains and Dividends
In addition to wages, investment income such as capital gains and dividends is also taxed. This creates a double taxation effect: profits are first taxed at the corporate level and then again at the shareholder level.
To reduce this effect, many countries apply reduced rates or exemptions for capital gains. The highest capital gains tax rates in the OECD are found in:
- Denmark – 42%;
- Chile – 40%;
- Norway – 37.8%.
At the same time, Belgium, Greece, South Korea, Luxembourg, New Zealand, Slovakia, Slovenia, Switzerland, and Turkey do not tax long-term capital gains from the sale of shares. These countries score higher in the ITCI because they actively encourage investment.
Kazakhstan currently does not tax capital gains. However, the new Tax Code, following Western practices, plans to introduce such a tax once a certain threshold is exceeded.
Dividend tax rates also vary widely:
- the highest rates are in Ireland (51%), South Korea (44.5%), and Denmark (42%);
- Estonia and Latvia apply a zero dividend tax at the personal level, taxing profits only when companies distribute them.
The OECD average dividend tax rate is 24.7%.
In Kazakhstan, dividends are taxed under a progressive system:
- 5% up to 230,000 times the Monthly Calculation Index (MCI);
- an additional 15% on amounts exceeding this threshold.
Individual taxes have a direct impact on labor supply, investment decisions, and overall economic growth. The effectiveness of personal taxation therefore depends not only on tax rates, but also on how fair, predictable, and neutral the system is toward work and investment.
The fewer cases of double taxation and special exceptions, the higher a country’s competitiveness and the more sustainable its economic development.
Uzakbay Almaz, Nazarbayev University, specifically for www.economyKZ.org
