Every year, we publish the International Tax Competitiveness Index, which measures the extent to which each of the 35 member nations’ taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. systems adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s low. A neutral tax code is one that seeks to raise the most revenue with the fewest economic distortions.
Since the Index’s creation, the United States has ranked near the bottom (in 2016 it ranked 31st of 35 OECD member nations). This is not surprising given our system’s combination of high marginal tax rates, especially on capital income, and a rather narrow tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . The only countries we rank better than are Greece, Portugal, Italy, and France.
|
Rank |
Score |
Country |
|---|---|---|
|
26 |
60.7 |
Belgium |
|
27 |
59.5 |
Israel |
|
28 |
58.9 |
Spain |
|
29 |
56.6 |
Poland |
|
30 |
55.7 |
Chile |
|
31 |
53.7 |
United States |
|
32 |
52.7 |
Greece |
|
33 |
50.9 |
Portugal |
|
34 |
46.1 |
Italy |
|
35 |
43.2 |
France |
The House GOP Blueprint would reform the U.S. tax code. It would lower marginal tax rates on work, saving, and investment while broadening the tax base. In addition, it would convert the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
into what is called a “destination-based cash-flow tax” (DBCFT).
If the U.S. were to enact this reform, the U.S.’s ranking would improve significantly on the Index. Our tax code would move from 31st place (out of 35 countries) to 3rd, just behind Estonia and New Zealand.
|
Rank |
Score |
Country |
|---|---|---|
|
1 |
100 |
Estonia |
|
2 |
92.1 |
New Zealand |
|
3 |
90.0 |
United States |
|
4 |
88.9 |
Latvia |
|
5 |
85.3 |
Switzerland |
|
6 |
82.8 |
Sweden |
|
7 |
81.9 |
Netherlands |
|
8 |
78.8 |
Luxembourg |
|
9 |
78.5 |
Australia |
|
10 |
75.6 |
Turkey |
The largest improvements in the U.S.’s ranking are driven by changes to the corporate income tax and the international tax system. This large swing makes sense. The House GOP blueprint would replace the current corporate income tax of 35 percent with a 20 percent DBCFT. The corporate score is driven by the lower marginal rate and the move to full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. of all capital investment. The international score is driven by the elimination of all international tax ruleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s, which is made possible by the border adjustment.
|
|
Current Law |
Blueprint |
|---|---|---|
|
Corporate Income Tax |
35th |
4th |
|
Consumption Taxes |
4th |
4th |
|
Property Taxes |
30th |
21st |
|
Income Taxes |
25th |
18th |
|
International Tax System |
34th |
2nd |
The changes in income taxes and property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es are modest. Property taxes improve slightly because the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. is repealed, but most of the score is still driven by the structure of state and local property taxes.
The income tax improves slightly because of the reduction of marginal rates, the flattening of the tax burden, and the slight base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. .
Consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es, which mainly grade a country’s VAT or sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , remain unchanged because these taxes are exclusively governed by state policy.
Most people are focused on the border adjustment in the House GOP plan. Indeed, it is an important part of the plan. But, there are many other aspects of the plan that would significantly improve the U.S. tax code.
Notes:
We will rank President Donald Trump’s forthcoming tax plan.
The House GOP Blueprint would make the U.S. tax code pretty unique among OECD nations. It would basically eliminate the corporate income tax and replace it with a DBCFT. The challenge is to fit this unique tax into the Index.
Fortunately, the OECD already has a unique country in terms of taxation: Estonia. Estonia does not have a corporate income tax. It has a 20 percent cash-flow tax that is very similar to that of the House GOP proposal, except that it is origin-based. I input the House GOP DBCFT into the Index the exact same way as the Estonian cash-flow tax.
Rather than completely ignoring the border adjustment, I included it in the score by giving the United States credit for eliminating all of its international tax rules that move the tax code from a pure territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. .
Changes in tax complexity could not be updated without additional information on the tax plan. As such, any simplification due to the House GOP reform is not captured.
Share