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 International Tax Competitiveness Index (ITCI) measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code. The ITCI considers more than forty variables across five categories: Corporate Taxes, Consumption TaxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es, Property TaxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, Individual Taxes, and International Tax RuleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s.
The ITCI attempts to display not only which countries provide the best tax environment for investment but also the best tax environment to start and grow a business.
- The ITCI finds that Estonia has the most competitive tax system in the OECD. Estonia has a relatively low corporate tax rate at 21 percent, no double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. on dividend income, a nearly flat 21 percent income tax rate, and a property tax that taxes only land (not buildings and structures).
- France has the least competitive tax system in the OECD. It has one of the highest corporate tax rates in the OECD at 34.4 percent, high property taxes that include an annual wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. , and high, progressive individual taxes that also apply to capital gains and dividend income.
- The ITCI finds that the United States has the 32nd most competitive tax system out of the 34 OECD member countries.
- The largest factors behind the United States’ score are that the U.S. has the highest corporate tax rate in the developed world and that it is one of the six remaining countries in the OECD with a worldwide system of taxation.
- The United States also scores poorly on property taxes due to its 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. and poorly structured state and local property taxes
- Other pitfalls for the United States are its individual taxes with a high 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. and the double taxation of capital gains and dividend income.
Taxes are a crucial component of a country’s international competitiveness. In today’s globalized economy, the structure of a country’s tax code is an important factor for businesses when they decide where to invest. No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance. In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement.
The United States provides a good example of an uncompetitive tax code. The last major change to the U.S. tax code occurred 28 years ago as part of the Tax Reform Act of 1986, when Congress reduced the top marginal 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 46 percent to 34 percent in an attempt to make U.S. corporations more competitive overseas. Since then, the OECD countries have followed suit, reducing the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today. The result: the United States now has the highest corporate income tax rate in the industrialized world.
While the corporate income tax rate is a very important determinant of economic growth and economic competitiveness, it is not the only thing that matters. The competitiveness of a tax code is determined by several factors. The structure and rate of corporate taxes, property taxes, income taxes, cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive.
Many countries have been working hard to improve their tax codes. New Zealand is a good example of one of those countries. 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.” In response to these global trends, New Zealand cut its top marginal income tax rate from 38 percent to 33 percent, shifted to a greater reliance on the goods and services tax, and cut their corporate tax rate to 28 percent from 30 percent. This followed a shift to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. in 2009. New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. , no general capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. , and no 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. es.
In a world where businesses, people, and money can move with relative ease, having a competitive tax code has become even more important to economic success. The example set by New Zealand and other reformist countries shows the many ways countries can improve their uncompetitive tax codes.
Our International Tax Competitiveness Index (ITCI) seeks to measure the business competitiveness of national tax systems. In order to do this, the ITCI looks at over 40 tax policy variables, including corporate income taxes, individual taxes, consumption taxes, property taxes, and the treatment of foreign earnings.
The ITCI scores the 34 member countries of the OECD on these five categories in order to rank the most competitive countries in the industrialized world.
Table 1. 2014 International Tax Competitiveness Index Rankings
|Country||Overall Score||Overall Rank||Corporate Tax Rank||Consumption Taxes Rank||Property Taxes Rank||Individual Taxes Rank||International Tax Rules Rank|
Estonia currently has the most competitive tax code in the OECD. Its top score is driven by four positive features of its tax code. First, it has a 21 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 21 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 taxing the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of the foreign profit earned by domestic corporations from domestic taxation with few restrictions.
While Estonia’s tax system is unique in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories. New Zealand has a relatively flat, low income tax that also exempts capital gains (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), low, broad-based consumption taxes (an 8 percent value-added tax), and a relatively flat 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. that exempts capital gains from taxation (combined rate of 36 percent). Sweden has a lower than average corporate income tax rate of 22 percent and no estate or wealth taxes. Australia, like New Zealand, has well-structured property and income taxes. Additionally, every single country in the top five has a territorial tax system.
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 that include 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.
The United States places 32nd out of the 34 OECD countries on the ITCI. There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39.1 percent. Second, it is one of the only countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 46.3 percent) that taxes both dividends and capital gains, albeit at a reduced rate.
In general, countries that rank poorly on the ITCI have high corporate income taxes. The five countries at the bottom of the rankings have corporate tax rates of 30 percent or higher, except for Italy with a rate of 27.5 percent. All five countries have high consumption taxes with rates of 20 percent or higher, except for the United States. They also levy relatively high property taxes on real property, have financial transaction taxes (except Spain), and have estate taxes. Finally, these bottom five countries have relatively high, progressive income taxes that apply to capital gains and dividends.
The International Tax Competitiveness Index
The International Tax Competitiveness Index seeks to measure the extent to which a country’s tax system adheres to two important principles of tax policy: competitiveness and neutrality.
A competitive tax code is a code that limits the taxation of businesses and investment. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world in order to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investments in order 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.
However, low rates are not the only component of a good tax code; a tax code must also be neutral. A neutral tax code is simply a tax code 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 capital gains and dividends taxes, estate taxes, and high progressive income taxes. This also means no targeted tax breaks for businesses for specific business activities.
Another important piece of neutrality is the proper definition of business income. For a business, profits are revenue minus costs. However, a country’s tax code may use a different definition. This is especially true with regard to capital investments. Most countries do not allow a business to account for the full cost of many investments they make, artificially driving up a business’s 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. . This reduces the after-tax rate of return on investment, thus diminishing the incentive to invest. A neutral tax code would define business income the way that businesses see it: revenue minus costs.
A tax code that is competitive and neutral promotes sustainable economic growth and investment. In turn, this leads to more jobs, higher wages, more tax revenue, and a higher overall quality of life.
It is true that taxes are not all that matter. There are many factors unrelated to taxes which affect a country’s economic performance and business competitiveness. Nevertheless, taxes affect the health of a country’s economy.
In order to measure whether a country’s tax system is neutral and competitive, the ITCI looks at over 40 tax policy variables. These variables measure not only the specific burden of a tax, but also how a tax is structured. For instance, a 25 percent corporate tax that taxes true business income is much better than a 25 percent corporate tax that overstates a business’s income through lengthy depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules.
The ITCI attempts to display not only which countries provide the best tax environment for investment, but also the best tax environment in which to start and grow a business.
To see the raw data used for calculations in this report, please see our GitHub page.
 Norman Gemmell, Tax Reform in New Zealand: Current Developments (June 2010), http://www.victoria.ac.nz/sacl/about/cpf/publications/pdfs/4GemmellPostHenrypaper.pdf.
 New Zealand has no general capital gains tax, though it does apply a tax on gains from foreign debt and equity investments. See New Zealand Now, Taxes, http://www.newzealandnow.govt.nz/living-in-nz/money-tax/nz-tax-system.
 Every OECD country except the United States, Norway, and Chile have cut their corporate tax rate since 2000. See Organization for Economic Cooperation and Development, Tax Reform Trends in OECD Countries (June 30, 2011), http://www.oecd.org/ctp/48193734.pdf.
 For a discussion of the methodology and a list of data sources, please see the Appendix.