2018 International Tax Competitiveness Index

October 23, 2018

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Introduction

The structure of a country’s tax code is an important determinant of its economic performance. A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government’s priorities. In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies.

Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly across the Organisation for Economic Co-operation and Development (OECD). Now, most nations raise a significant amount of revenue from broad-based taxes such as payroll taxes and value-added taxes (VAT).

New Zealand is a good example of a country that has reformed its tax system. In a 2010 presentation, the chief economist of the New Zealand Treasury stated, “Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive.”[1] In response to these global trends, New Zealand cut its top marginal individual income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax, and cut its corporate tax rate to 28 percent from 30 percent. New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no payroll taxes.

Some nations, however, have not kept up with the global trend. Over the last few decades, France has introduced a number of reforms that have significantly increased marginal tax rates on work, saving, and investment. For example, France recently instituted a corporate income surtax, which joined other distortive taxes such as the financial transactions tax, a net wealth tax, and an inheritance tax.

Following tax reform in the United States, France now has the highest taxes on corporate income—a combined rate of about 34 percent. Though the central government statutory rate is scheduled to be lowered over the next several years, many more changes are necessary for France to have a competitive tax code.

The International Tax Competitiveness Index

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. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can lead to tax avoidance.

According to research from the OECD, corporate taxes are most harmful for economic growth, with personal income taxes and consumption taxes being less harmful. Taxes on immovable property have the smallest impact on growth.[2]

Separately, a neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. This also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.

A tax code that is competitive and neutral promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.

There are many factors unrelated to taxes which affect a country’s economic performance. Nevertheless, taxes play an important role in the health of a country’s economy.

To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of taxes, but also how taxes are structured. The Index looks at a country’s corporate taxes, individual income taxes, consumption taxes, property taxes, and the treatment of profits earned overseas. The ITCI gives a comprehensive overview of how developed countries’ tax codes compare, explains why certain tax codes stand out as good or bad models for reform, and provides important insight into how to think about tax policy.

2018 Rankings

For the fifth year in a row, Estonia has the best tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

Table 1: 2018 International Tax Competitiveness Index Rankings
Country Overall Rank Overall Score Corporate Tax Rank Individual Taxes Rank Consumption Taxes Rank Property Taxes Rank International Tax Rules Rank
Estonia 1 100.0 1 1 9 1 6
Latvia 2 86.0 2 2 27 6 5
New Zealand 3 83.0 18 3 6 3 15
Luxembourg 4 80.5 21 17 2 18 1
Netherlands 5 77.5 19 8 12 10 3
Switzerland 6 77.0 6 9 1 34 8
Sweden 7 75.0 7 20 16 7 7
Australia 8 72.2 27 19 7 4 17
Czech Republic 9 69.6 8 4 33 13 9
Austria 10 69.6 15 21 10 9 13
Slovak Republic 11 69.4 10 6 32 2 27
Turkey 12 68.8 17 5 24 17 10
Hungary 13 68.4 3 15 34 26 2
Finland 14 67.7 5 27 14 11 18
Norway 15 66.2 13 11 18 24 14
Germany 16 65.3 24 28 11 14 11
Korea 17 64.4 28 10 5 25 31
Canada 18 64.0 22 23 8 20 22
Belgium 19 63.8 23 7 25 23 12
Ireland 20 63.7 4 33 23 12 21
Denmark 21 63.7 14 30 17 8 23
Slovenia 22 63.6 12 12 28 21 16
United Kingdom 23 63.1 16 24 22 30 4
United States 24 61.5 20 26 4 28 32
Iceland 25 60.2 11 31 19 22 20
Japan 26 59.5 35 25 3 29 25
Spain 27 57.4 26 18 15 31 19
Mexico 28 57.2 31 13 26 5 34
Greece 29 51.9 25 14 30 27 29
Israel 30 51.7 29 35 13 15 33
Chile 31 48.3 30 22 29 16 35
Portugal 32 48.2 33 29 31 19 28
Poland 33 47.7 9 16 35 32 30
Italy 34 46.9 32 32 20 33 26
France 35 41.4 34 34 21 35 24

While Estonia’s tax system is the most competitive in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories. Latvia, which recently adopted the Estonian system for corporate taxation, also has a relatively efficient system for taxing labor. New Zealand has a relatively flat, low-rate individual income tax that also exempts capital gains (with a combined top rate of 33 percent), a well-structured property tax, and a broad-based value-added tax. Switzerland has a relatively low corporate tax rate (21.1 percent), a low, broad-based consumption tax, and a relatively flat individual income tax that exempts capital gains from taxation. Sweden has a lower-than-average corporate income tax rate of 22 percent, no estate or wealth taxes, and a well-structured value-added tax and individual income tax.

For the fifth year in a row, France has the least competitive tax system in the OECD. It has one of the highest corporate income tax rates in the OECD (34.4 percent), high property taxes, an annual net wealth tax, a financial transaction tax, and an estate tax. France also has high, progressive, individual income taxes that apply to both dividend and capital gains income.

In general, countries that rank poorly on the ITCI levy relatively high marginal tax rates on corporate income. The five countries at the bottom of the rankings all have higher than average corporate tax rates, except for Poland at 19 percent. In addition, all five countries have high consumption taxes, with rates of 20 percent or higher, except for Chile at 19 percent.

Notable Changes from Last Year[3]

Belgium

Belgium’s ranking improved from 25th to 19th after adopting a significant tax reform package that will progressively reduce its statutory income tax rate over the next several years. For 2018, the combined corporate income tax rate is 29.58 percent, a reduction from 33.99 percent in 2017. The participation exemption was also increased from 95 percent to 100 percent.

Compliance time for consumption taxes fell by 25 hours from 100 in 2017 to 75 hours in 2018.

Chile

Chile amended its personal income tax and reduced its top marginal tax rate from 40 percent to 35 percent, partially flattening its rate structure. Chile improved from 33rd to 31st.

Estonia

Estonia instituted changes to its VAT and individual income tax. The threshold for the VAT was increased by 8.5 percent, from $28,571 to $31,020. Estonia remained ranked 1st overall.

Israel

Israel reduced its corporate income tax rate from 24 percent to 23 percent, but fell one place from 29th to 30th on the Index.

Japan

Though Japan improved compliance costs associated with its corporate income taxes, the country fell three spots on its ranking from 23rd to 26th, being passed by countries making more significant improvements to their tax systems. Compliance time associated with corporate income taxes fell from 62 hours to 38 hours, a reduction of nearly 40 percent.

Korea

Korea increased tax rates on corporate income and dividends, dropping its ranking from 15th in 2017 to 17th this year. The corporate income tax rate went from 24.2 percent to 27.5 percent and the rate applied to dividends increased from 35.4 percent to 40.3 percent.

Note: Due to some data limitations, some more recent tax changes in some countries may not be reflected in this year’s version of the International Tax Competitiveness Index. Last year’s scores published in this report can differ from previously published rankings due to both methodological changes and corrections made to previous years’ data. Changes in methodology have been applied to prior years to allow consistent comparison across years.

Table 2: Changes from Last Year
Country 2016 Rank 2016 Score 2017 Rank 2017 Score 2018 Rank 2018 Score Change in Rank Change in Score
Australia 8 74.17 8 75.73 8 72.20 0 -3.53
Austria 13 69.56 11 74.09 10 69.59 1 -4.50
Belgium 24 62.20 25 62.89 19 63.76 6 0.87
Canada 18 66.45 19 67.40 18 64.00 1 -3.40
Chile 31 51.55 33 50.91 31 48.30 2 -2.61
Czech Republic 14 69.45 9 74.37 9 69.65 0 -4.72
Denmark 23 64.50 18 67.78 21 63.72 -3 -4.06
Estonia 1 100.00 1 100.00 1 100.00 0 0.00
Finland 11 71.53 13 70.01 14 67.75 -1 -2.26
France 35 43.19 35 41.22 35 41.42 0 0.20
Germany 15 68.47 16 68.87 16 65.33 0 -3.55
Greece 30 51.82 30 54.63 29 51.94 1 -2.68
Hungary 19 65.51 14 69.90 13 68.36 1 -1.55
Iceland 20 65.36 24 63.23 25 60.24 -1 -2.98
Ireland 21 64.72 22 65.50 20 63.75 2 -1.75
Israel 28 54.51 29 54.83 30 51.68 -1 -3.15
Italy 34 46.44 34 49.56 34 46.86 0 -2.69
Japan 26 59.12 23 64.89 26 59.51 -3 -5.38
Korea 12 70.17 15 69.13 17 64.36 -2 -4.77
Latvia 2 86.56 3 84.72 2 85.97 1 1.24
Luxembourg 5 80.86 4 83.25 4 80.46 0 -2.80
Mexico 27 58.39 27 59.06 28 57.20 -1 -1.85
Netherlands 4 83.80 5 80.31 5 77.53 0 -2.78
New Zealand 3 84.09 2 85.08 3 82.95 -1 -2.13
Norway 17 66.61 17 68.34 15 66.23 2 -2.11
Poland 32 51.32 32 52.13 33 47.70 -1 -4.43
Portugal 33 50.14 31 52.80 32 48.20 -1 -4.60
Slovak Republic 10 71.89 10 74.18 11 69.36 -1 -4.82
Slovenia 16 67.62 20 66.76 22 63.65 -2 -3.12
Spain 25 59.46 26 61.01 27 57.45 -1 -3.56
Sweden 7 79.03 7 79.31 7 75.03 0 -4.28
Switzerland 6 79.06 6 79.53 6 77.05 0 -2.48
Turkey 9 72.43 12 73.05 12 68.78 0 -4.28
United Kingdom 22 64.67 21 66.56 23 63.05 -2 -3.51
United States 29 53.43 28 55.41 24 61.49 4 6.08

Latvia

Latvia implemented a business tax reform package that matches the competitive Estonian system. Latvia now only applies business taxes on distributed profits at a rate of 20 percent. It was already among the top five most competitive countries, and these reforms helped Latvia remain in 2nd place behind Estonia.

Luxembourg

Luxembourg replaced a previously repealed patent box with an 80 percent exemption on income from patents, software, and other intellectual property. Luxembourg maintained its ranking of 4th on the Index.

Mexico

Though compliance time still remains relatively high at 102 hours, Mexico reduced the time necessary to comply with corporate taxes by 16 percent, down from 122 hours. Still, Mexico fell one place from 27th to 28th on the Index.

New Zealand

New Zealand fell to 3rd place on the Index from 2nd place last year. Compliance time connected to consumption taxes did fall from 59 to 47 hours.

Norway

Norway improved from 17th to 15th on the Index after cutting its corporate tax rate from 24 percent to 23 percent.

Poland

Poland increased the top marginal tax rate on individual income from 38.8 percent to 39.9 percent. It also imposed an asset tax on certain financial institutions. It fell from 32nd to 33rd on the Index ranking.

United States

The United States adopted a comprehensive tax reform package that included a reduction of the corporate income tax rate from 35 percent to 21 percent, improvements to expensing of capital investments, and rate changes for the personal income tax. As a result, the U.S. improved its ranking from 28th to 24th.

Notes


[1] Norman Gemmell, “Tax Reform in New Zealand: Current Developments,” from Australia’s Future Tax System: A Post-Henry Review Conference in Sydney, June 2010, https://web.archive.org/web/20160429192333/http://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdf.

[2] Organisation for Economic Co-operation and Development (OECD), “Tax and Economic Growth,” Economics Department Working Paper No. 620, July 11, 2008.

[3] Due to some data limitations, some more recent tax changes in some countries may not be reflected in this year’s version of the International Tax Competitiveness Index. Last year’s scores published in this report can differ from previously published rankings due to both methodological changes and corrections made to previous years’ data.

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Previous Versions of International Tax Competitiveness Index

2017 International Tax Competitiveness Index

October 31, 2017

2016 International Tax Competitiveness Index

October 5, 2016

2015 International Tax Competitiveness Index

September 28, 2015

2014 International Tax Competitiveness Index

September 15, 2014