The United States ranks an unenviable 30th out of 35 OECD nations on the 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. Foundation’s newly-released 2017 International Tax Competitiveness Index, which seeks to measure the competitiveness and neutrality of a country’s tax system. It is also dead last on the corporate tax component of the Index. That could change substantially under federal tax reform.
Yesterday, House Ways and Means Chairman Kevin Brady (R-TX) unveiled a committee draft of tax reform legislation which makes substantial changes to the individual, business, and international code. While revisions are inevitable, were Congress to enact the tax reform legislation introduced yesterday, the United States would improve from 30th to 21st overall, and from 35th to 15th on the corporate component of the International Tax Competitiveness Index.
A description of the major features of the chairman’s mark can be found here. The following provisions drive the projected rank change on the International Tax Competitiveness Index:
- Cutting 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. rate from 35 to 20 percent
- Eliminating net operating loss (NOL) carrybacks
- Allowing NOLs to be carried forward indefinitely, but with a cap of 90 percent of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
- Adopting a territorial system, albeit with some country limitations
- Implementing an “effectively connected income” regime
- Providing (temporary) 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 machinery and equipment
The increase in 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. threshold is not represented in the Index. The estate tax is, however, slated for elimination in six years, and its ultimate repeal would further improve the United States’ ranking.
Considered as a whole, these changes would make the United States substantially more competitive, not only with rates that are more in line with the rest of the developed world, but also with a tax structure that rolls back some of the current disincentives to investment in the United States. Here’s how the U.S. ranks on the Index now, and how it would rank if all the proposals in the Ways and Means committeeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. draft were implemented:
| Overall Rank | Corporate Tax | Consumption Taxes | Property Taxes | Individual Taxes | International Tax Rules | |
|---|---|---|---|---|---|---|
|
Current |
30 |
35 |
4 |
29 |
25 |
33 |
|
Projected |
21 |
15 |
4 |
25 |
25 |
32 |