Can the U.S. Stay Competitive in a Tax-Cutting World?

July 12, 2007

The U.S. is routinely described as one of the lowest tax jurisdictions in the industrialized world, but a Tax Foundation comparison, authored by Chris Atkins, of top individual income tax rates calls this conventional wisdom into question. Currently, 9 OECD countries (including 4 members of the European Union) have lower top marginal rates for individuals than the United States (see table below), and more than half of all OECD nations have lowered their rates since 2000.

Lawmakers in the House and Senate approved budget resolutions this year that allow for the 2001 tax cuts to expire, and some are considering imposing surtaxes on the top individual tax rate as part of an AMT reform package. Chris Atkins’ research shows that the combination of the two proposals would push the top marginal tax rate in the U.S. up to 49.49%, giving us the 9th highest top marginal rate in the OECD (ahead of Canada, Germany, Switzerland, and the United Kingdom, among others).

The U.S. already has the second-highest combined corporate income tax rate in the OECD. Only Japan’s is higher. Since many U.S. businesses are not large, publicly-held corporations but small or medium-sized businesses that pay their taxes through the individual income tax system (often at the top marginal rate), a high individual income tax rate will stunt our economic growth by increasing the cost of employing labor in the U.S., impeding entrepreneurship and innovation, and harming the international competitiveness of many small and medium-sized U.S. businesses.

Top Marginal Combined Individual Income Tax Rates in the OECD 2006

Country

Top Combined Marginal Individual Income Tax Rate in 2006

Rank

Denmark

59.74%

1

Sweden

56.60%

2

France

55.85%

3

Belgium

53.50%

4

Netherlands

52.00%

5

Finland

50.90%

6

Austria

50.00%

7

Japan

50.00%

7

Australia

48.50%

9

Canada

46.41%

10

Germany

45.37%

11

Spain

45.00%

12

Italy

44.10%

13

Switzerland

42.06%

14

Portugal

42.00%

15

Ireland

42.00%

16

Poland

40.00%

17

Greece

40.00%

18

United Kingdom

40.00%

19

Norway

40.00%

20

United Statesa

39.76%

21

New Zealand

39.00%

22

Luxembourg

38.95%

23

Korea

38.50%

24

Iceland

36.72%

25

Hungary

36.00%

26

Turkey

35.60%

27

Czech Republic

32.00%

28

Mexico

29.00%

29

Slovak Republic

19.00%

30

Average

42.95%

a) Since a combined federal and state rate is presented, the U.S. rate is adjusted to account for the deductibility of state and local taxes. The U.S. is the only OECD country that allows the state and local tax deduction. In 2006, we assume that less than 20 percent of the state and local tax deduction was clawed back by Pease.


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