2017 International Tax Competitiveness

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2017 International Tax Competitiveness

The structure of a country’s tax 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 rates 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 taxes 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.”[1] In response to these global trends, New Zealand cut its top marginal individual income tax 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 tax, no general capital gains tax, and no payroll taxes.

Some nations, however, have not kept up with the global trend. The United States, for example, has not reduced its federal corporate income tax rate from 35 percent since the early 1990s. As a result, its combined federal, state, and local corporate tax rate of about 39 percent is significantly higher than the average rate of 25 percent among OECD nations.[2] In addition, as most OECD nations have moved to a territorial tax system, the United States has continued to tax the worldwide profits of its domestic corporations.

Other nations have moved further from well-structured tax policy. 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 surtax, which joined other distortive taxes such as the financial transactions tax, a net wealth tax, and an inheritance tax.

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.

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 taxes, 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.

2017 Rankings

 

Country Overall Rank Overall Score Corporate Tax Rank Consumption Taxes Rank Property Taxes Rank Individual Taxes Rank International Tax Rules Rank
Estonia 1 100.0 1 10 1 7 7
New Zealand 2 88.7 18 7 3 1 15
Switzerland 3 85.2 7 1 33 4 9
Latvia 4 85.0 2 27 7 6 5
Luxembourg 5 82.7 26 5 18 13 2
Sweden 6 81.8 6 11 6 22 8
Australia 7 78.9 25 6 5 11 17
Netherlands 8 77.5 19 14 24 14 1
Czech Republic 9 74.3 8 32 10 3 10
Slovak Republic 10 74.1 10 31 2 5 27
Turkey 11 73.7 15 25 17 2 11
Korea 12 71.8 20 3 27 8 31
Austria 13 71.3 16 12 9 33 6
United Kingdom 14 70.8 17 17 31 18 3
Norway 15 70.7 14 23 16 10 14
Ireland 16 70.4 4 24 12 23 20
Canada 17 69.1 21 8 23 17 22
Slovenia 18 68.2 9 26 15 16 16
Finland 19 68.2 5 16 19 28 21
Hungary 20 67.0 3 35 26 24 4
Denmark 21 67.0 13 21 8 30 23
Japan 22 66.8 34 2 28 26 25
Germany 23 66.6 23 13 13 32 12
Iceland 24 63.5 12 22 22 31 19
Mexico 25 62.2 31 19 4 9 35
Israel 26 61.5 29 9 11 27 32
Belgium 27 60.3 30 33 25 12 13
Spain 28 59.8 27 15 32 21 18
Greece 29 57.2 24 28 21 15 30
United States 30 55.1 35 4 29 25 33
Poland 31 54.4 11 34 30 20 29
Chile 32 53.1 22 29 14 19 34
Portugal 33 51.9 32 30 20 29 28
Italy 34 47.7 28 20 34 34 26
France 35 43.4 33 18 35 35 24
Table 1. 2017 International Tax Competitiveness Index Rankings

 

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