Every year, we publish the International Tax Competitiveness Index, which measures the extent to which each of the 35 member nations’ tax systems adheres to two important aspects of 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. policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates 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 base. 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 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.
. In addition, it would convert the corporate 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 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. 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 rules, which is made possible by the border adjustment.
|
|
Current Law |
Blueprint |
|---|---|---|
|
Corporate Income Tax |
35th |
4th |
|
4th |
4th |
|
|
30th |
21st |
|
|
Income Taxes |
25th |
18th |
|
International Tax System |
34th |
2nd |
The changes in income taxes and property taxes are modest. Property taxes improve slightly because the estate tax 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 broadening.
Consumption taxes, which mainly grade a country’s VAT or sales tax, 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 system.
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.
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