Since anyone can remember, most league tables that rate the comparative costliness of key cities and countries around the world have focused on coming up with an average cost of a typical shopping basket of goods and services consumed by the average resident, or expat, living in each of them.
Perhaps the best-known variation on this has been The Economist magazine’s Big Mac Index, which uses the cost of a single well-known item from McDonald’s franchisees around the world to compare the purchasing power of the various major currencies. Recent years have also seen attempts at iPod, Tall Latte and Ikea Billy Bookshelf indexes, by various media organisations and others.
Now Sovereign, the global corporate services and trusts company, has come up with what it says is brand new way of ranking jurisdictions that boils down to evaluating cities on the basis of how much of a “top earner’s” pay cheque is needed to buy a beer there.
Using this measure, Sovereign’s researchers discovered that Copenhagen, Denmark is the most expensive place for a top earner to buy a beer, followed, in declining order, by New York, NY; Tokyo; Osaka; Paris and Reykjavik. (See below.)
1 Calculated by taking the Economist Intelligence Unit’s Worldwide Cost of Living Index score and multiplying it by the top rate of personal tax on earned income for the city in question. Social security contributions are not taken into account because these have only a marginal impact on top earners; this calculation also takes no account of tax allowances that might reduce the headline tax rates substantially
Their ranking, the Sovereign researchers note, compare with the Economist Intelligence Unit’s most recent cost-of-living league table, which rates 133 cities around the world on the basis of the price of 160 goods and services, and which ranks Singapore as the most expensive place to live, followed by Hong Kong, Zurich, Tokyo, Osaka and Seoul. (See below.)
In a summary of their findings, the Sovereign researchers note that the Economist Intelligence Unit (EIU) survey “is designed to assist businesses to calculate compensation packages for overseas staff postings”, with prices gathered by the EIU’s research team being converted into US dollars, using the prevailing exchange rate, before being used to derive a bi-annual ranking.
One problem with this straightaway, the Sovereign researchers point out, is that “as those actually living in, as opposed to visiting, a particular city will most likely be earning and spending in the local currency, such a conversion may not be of relevance”.
At the same time, different countries tax their residents and citizens differently, with some taxing on the basis of residency, some territorially, and at least one – the US – globally and on the basis of citizenship.
“So with the exception of US citizens, a more relevant measure, in our opinion, would be to calculate how much an individual living and earning in a city would need to earn to afford these goods and services, after paying local taxes on their income,” the Sovereign researchers explain.
“For example, if a pint of beer costs US$10 in Los Angeles and the local tax rate is 50%, it would clearly be necessary to earn US$20 to purchase that beer out of employment income. That same beer might cost US$15 in George Town, the capital of the Cayman Islands, but there is no personal income tax in Cayman.
“As a result, an employed person living in Cayman would need to earn only US$15 to purchase that beer. By this criterion, the beer is cheaper in net terms in George Town.
A spokesperson said Sovereign plans to continue to produce its cost-of-living index bi-annually.
To read and download the Sovereign report, which in addition to its Top Earners’ Cost of Living Index also features an index for “average earners”, click here.
Founded in Gibraltar in 1987, the Sovereign Group is now a multi-jurisdictional financial services provider, with offices in some 18 cities around the world.