The U.S.’s New Ranking on the International Tax Competitiveness Index

On December 22nd, 2017, President Donald Trump signed the “Tax Cut and Jobs Act” (TCJA) into law, which made a number of changes to the United States’ 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. code. The enacted law made changes to both the corporate and individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. codes and it is expected to improve the overall ranking of the United States on the International Tax Competitiveness Index.

The new tax code is projected to improve the United States’ current ranking from 30th among the 35 Organisation for Economic Co-operation and Development (OECD) countries to 25th, an improvement of five places.

The United States’ Projected International Tax Competitiveness Ranking Under the TCJA

	Overall Rank	Corporate Tax Rank	Consumption Taxes Rank	Property Taxes Rank	Individual Taxes Rank	International Tax Rules Rank
Previous Ranking	30	35	4	29	25	33
New Ranking	25	26	4	29	25	32

The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low. A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions.

The United States’ expected change in rank will be driven primarily by improvements to its 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. code, from last place (35 out of 35 countries) to 26th. Two changes are expected to drive the improvement to the U.S.’s corporate income tax. First, the statutory corporate tax rate (federal plus the average of state and local taxes) declined from 38.9 to 25.7 percent, which is slightly higher than the 24 percent average among all OECD nations. Second, the new bill enacted full expensing—the ability for companies to fully deduct new investments the year in which they were put in place—for machinery and equipment.

The improvements in the corporate tax were somewhat muted by the reduction in the value of loss carryforwards, which were limited to 80 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. ; the elimination of loss carrybacks; and the introduction of a special lower tax rate of 13.125 percent on what is called “foreign-derived intangible income,” which operates similarly to a patent box, but only applies to export-related intellectual property income.

The United States also is expected to improve with respect to its “International Tax Rules” from 33rd to 32nd. The TCJA introduced a number of changes to the treatment of foreign-source income of multinational corporations. The law enacted a dividend-received deduction, or a “territorial” tax system. In conjunction with the new territorial tax system, the law introduced new anti-base erosion rules meant to prevent companies from shifting profits to lower-tax jurisdictions. The new law made no changes to withholding taxes and treaty networks, which are also important to a country’s international tax system.

The TCJA did alter individual income taxes, but the changes offset one another, resulting in no improvement. As such, the United States rank is expected to remain at 25. The TCJA reduced the top 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. (including payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. ) from 48.6 to 47.4 percent. At the same time, the average tax wedge on labor declined slightly from 31.7 percent to approximately 30 percent. Offsetting those slight improvements, the new tax law increased the threshold at which the top rate applies from eight times average income to 9.5 times, narrowing the income tax base. The law also slightly increased marginal tax rates on capital gains and dividends by capping the state and local tax deduction.

There is no change expected to the United States’ ranking in property taxes or consumption taxes. The only change that the TCJA made to property taxes was an increase in the exemption level of the estate tax. However, the Index does not currently consider granular changes to estate and inheritance taxes. No changes were made to consumption taxes as they are governed by state and local governments.

The TCJA made many other changes that may have an impact on the United States’ ranking, but will require additional data. For example, much of the tax law will undoubtedly alter the complexity of the tax system and will have a direct effect on compliance costs. Those changes will be incorporated once that data is available.

According to the International Tax Competitiveness Index, the TCJA made several improvements to the United States’ tax code. However, the Index also shows that there are many parts of the tax code that still require examination.

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