The structure of a country’s 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 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 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. s 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 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 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.” In response to these global trends, New Zealand cut its top marginal 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. 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 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 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 surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. , which joined other distortive taxes such as the financial transactions tax, a net 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 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 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 being less harmful. Taxes on immovable property have the smallest impact on growth.
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 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, 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.
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 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. that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.
|Country||Overall Rank||Overall Score||Corporate Tax Rank||Individual Taxes Rank||Consumption Taxes Rank||Property Taxes Rank||International Tax Rules Rank|
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 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 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 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. . 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
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 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 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 reduced its corporate income tax rate from 24 percent to 23 percent, but fell one place from 29th to 30th on the Index.
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 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.
|Country||2016 Rank||2016 Score||2017 Rank||2017 Score||2018 Rank||2018 Score||Change in Rank||Change in Score|
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 replaced a previously repealed patent boxA patent box—also referred to as intellectual property (IP) regime—taxes business income earned from IP at a rate below the statutory corporate income tax rate, aiming to encourage local research and development. Many patent boxes around the world have undergone substantial reforms due to profit shifting concerns. with an 80 percent exemption on income from patents, software, and other intellectual property. Luxembourg maintained its ranking of 4th on the Index.
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 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 improved from 17th to 15th on the Index after cutting its corporate tax rate from 24 percent to 23 percent.
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.
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.
 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.
 Organisation for Economic Co-operation and Development (OECD), “Tax and Economic Growth,” Economics Department Working Paper No. 620, July 11, 2008.
 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.Share