The U.S. Tax Code is its Worst Competitive Weakness

September 22, 2014

The Tax Foundation’s International Tax Competitiveness Index ranks the United States tax code 32nd out of 34 OECD countries. An obvious question to ask, then, is why the U.S. remains so wealthy, and so successful at creating new businesses.

A report from Harvard Business School – a survey on U.S. competitiveness – helps answer this question. The HBS alumni, like Tax Foundation, evaluated the U.S. tax code as very uncompetitive. However, on several other dimensions, like higher education and innovation, the U.S. excelled:

In other words, the U.S. is indeed a wealthy and competitive country. But it is wealthy and competitive despite its tax code, not because of it.

Taxes certainly do matter: France, Portugal, Italy, and Spain – the least tax-competitive countries in Europe in our Index, have struggled a great deal to emerge from the recession; France and Italy have recorded two consecutive years of negative GDP growth, Portugal has recorded three, and Spain has had six. In contrast, Estonia, Switzerland and Sweden – the top three European nations – have consistently recorded positive GDP growth every year since the end of the recession.

But taxes are not the only thing that matter. The American economy has fared much better than the economies of other countries with poor tax competitiveness. That is where the other, more positive elements of the Harvard Business School report become more important. The U.S. has flexible labor markets, and it reliably leads the world in technology, higher education, and innovation.

Simply put, while assessments of the U.S. tax code – both at Tax Foundation and elsewhere – are bleak, there is much to be optimistic about in America. We are a smart nation in need of a smarter tax code.

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