The U.S.’s New Ranking on the International Tax Competitiveness Index
February 5, 2018
On December 22nd, 2017, President Donald Trump signed the “Tax Cut and Jobs Act” (TCJA) into law, which made a number of changes to the United States’ tax code. The enacted law made changes to both the corporate and individual income tax codes and it is expected to improve the overall ranking of the United States on the International Tax Competitiveness Index.
The new tax code is projected to improve the United States’ current ranking from 30th among the 35 Organisation for Economic Co-operation and Development (OECD) countries to 25th, an improvement of five places.
|Overall Rank||Corporate Tax Rank||Consumption Taxes Rank||Property Taxes Rank||Individual Taxes Rank||International Tax Rules Rank|
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. A neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions.
The United States’ expected change in rank will be driven primarily by improvements to its corporate income tax code, from last place (35 out of 35 countries) to 26th. Two changes are expected to drive the improvement to the U.S.’s corporate income tax. First, the statutory corporate tax rate (federal plus the average of state and local taxes) declined from 38.9 to 25.7 percent, which is slightly higher than the 24 percent average among all OECD nations. Second, the new bill enacted full expensing—the ability for companies to fully deduct new investments the year in which they were put in place—for machinery and equipment.
The improvements in the corporate tax were somewhat muted by the reduction in the value of loss carryforwards, which were limited to 80 percent of taxable income; the elimination of loss carrybacks; and 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.
The United States also is expected to improve with respect to its “International Tax Rules” from 33rd to 32nd. The TCJA introduced a number of 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 TCJA did alter individual income taxes, but the changes offset one another, resulting in no improvement. As such, the United States rank is expected to remain at 25. The TCJA reduced the top marginal tax rate (including payroll tax) from 48.6 to 47.4 percent. At the same time, the average tax wedge on labor declined slightly from 31.7 percent to approximately 30 percent. Offsetting those slight improvements, 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.
There is no change expected to the United States’ ranking in property taxes or consumption taxes. The only change that the TCJA made to property taxes was an increase in the exemption level of the estate tax. However, the Index does not currently consider granular changes to estate and inheritance taxes. No changes were made to consumption taxes as they are governed by state and local governments.
The TCJA made many other changes that may have an impact on the United States’ ranking, but will require additional data. For example, much of the tax law will undoubtedly alter the complexity of the tax system and will have a direct effect on compliance costs. Those changes will be incorporated once that data is available.
According to the International Tax Competitiveness Index, the TCJA made several improvements to the United States’ tax code. However, the Index also shows that there are many parts of the tax code that still require examination.