The TCJA Improved the United States’ International Tax Competitiveness Index Rankings

Changes made to the corporate and individual tax codes by last year’s Tax Cuts and Jobs Act helped boost the United States’ ranking from 28^th to 24^th in our 2018 International Tax Competitiveness Index. Reductions in those tax rates led to improvements in the U.S.’s overall ranking among Organisation for Economic Co-operation and Development (OECD) nations as well as within individual tax components.

The United States’ improvement is primarily driven by two significant changes made to the corporate income tax code, in which the component ranking jumped from 34th to 20th.

The new law lowered the statutory federal rate from 35 percent to 21 percent, which has the effect of lowering the federal and average of state and local corporate rates from 38.9 to 25.7 percent. The U.S.’s new average rate of 25.7 percent is just slightly above the OECD average of 24 percent.

Another corporate tax code change enacted in the TCJA is 100 percent bonus depreciation, or full expensing. This provision improves cost recovery, as it allows businesses to immediately write off capital investments in things like machinery and equipment.

The improvements in the corporate tax were somewhat muted by 1) the reduction in the value of loss carryforwards, which were limited to 80 percent of taxable income; 2) the elimination of loss carrybacks; and, 3) the introduction of a special lower tax rate of 13.125 percent on what is called “foreign-derived intangible income,” which operates similarly to a patent box, but only applies to export-related intellectual property income.

On the individual side, the U.S. rank improved slightly, from 27th to 26th place. The TCJA reduced the top marginal tax rate. However, the new tax law increased the threshold at which the top rate applies from eight times average income to 9.5 times, narrowing the income tax base. The law also slightly increased marginal tax rates on capital gains and dividends by capping the state and local tax deduction.

The United States also improved with respect to the international tax rules subcomponent, moving from 33rd to 32nd. The TCJA introduced several changes to the treatment of foreign-source income of multinational corporations. The law enacted a dividend-received deduction, or a “territorial” tax system. In conjunction with the new territorial tax system, the law introduced new anti-base erosion rules meant to prevent companies from shifting profits to lower-tax jurisdictions. The new law made no changes to withholding taxes and treaty networks, which are also important to a country’s international tax system.

The only change that the TCJA made to property taxes was an increase in the exemption level of the estate tax. The new law did not change consumption taxes, as state and local governments govern them.

According to the 2018 International Tax Competitiveness Index, the TCJA made several important changes to the United States’ tax code which improved the U.S. ranking by four places. However, the Index also shows that there are many parts of the tax code that still require examination.