United States, France among Worst Countries for Tax Competiveness

Published September 17, 2014

Earlier this week, the Tax Foundation’s annual International Tax Competitiveness Index (ITCI) report was released, disclosing some unsurprising results. Among the study’s rankings, the United States was ranked as the third-worst country in the Organisation for Economic Co-Operation and Development (OECD), out of 34 measured countries.

Using the Tax Foundation’s metrics, only Portugal and France were found to have tax structures and systems more antagonistic to free-market competiveness and neutrality. The ITCI measured forty variables grouped into five categories, including analyses of corporate taxes, consumption taxes, property taxes, individual taxes, and international tax rules.

Best in Show

In the report, Estonia’s tax system achieved the highest possible score, meaning that its system was the closest to the ideal of a competitive and neutral tax structure. Estonia’s corporate and property tax systems garnered respective first-place rankings, in addition to being rated as the second-fairest individual taxation system in the OECD.

Estonia’s tax system includes a 21 percent tax on corporate income, which is only applied to certain classes of profits. The Eastern European country also features a 21 percent flat tax on personal income, excluding investment dividends. Additionally, the country’s national property tax applies exclusively to the value of land itself, instead of property or capital.

In recent years, Estonia has adopted a territorial tax system which exempts nearly all foreign profit earned by domestic corporations — a policy which experts say encourages companies to relocate to the country, and to expand operations into other countries. 

Best Practices

The ITCI report often serves as a guide for national economic advisors, seeking to learn of best practices observed by other OECD nations.

In 2010, New Zealand’s top economist, Norman Gemmell, gave a presentation in 2010 in which he warned that “global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive.” 

Since then, however, New Zealand reduced its top marginal income tax rate from 38 percent to 33 percent, cut their corporate tax rate from 30 percent to 28 percent, and adopted a more territorial tax system. These policy changes have resulted in New Zealand earning second place overall in this year’s survey. In addition to the implemented reforms, New Zealand did not have an inheritance tax, a general capital gains tax, or a payroll tax.

Post-Mortem Review

Another highlight of the report is an in-depth analysis of why United States was ranked so poorly, in terms of competitiveness and neutrality. The last major change to the nation’s tax code was in 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent, as part of the Tax Reform Act. Since then, the United States’ progress towards a more fair tax structure has stagnated, in comparison to other countries. While the average tax rate of OECD countries is 25 percent, the U.S. has a rate of 39.1 percent — the highest tax rate among OECD nations.

Also, the U.S. is also one of the only countries in the OECD without a territorial tax system, exempting foreign profits earned by domestic corporations from double taxation. Progressive individual income taxes are also quite high, at a combined top rate of 46.3 percent, taxing dividends and capital gains.

France, receiving dreadful ratings in all of the study’s metrics, comes in dead last in the individual and property tax categories. The report explains that France’s near-universally low ratings stem from its distinction as the implementer of sky-high corporate income tax rates, high property taxes and annual net-wealth tax, financial transaction taxes, implementation of a death tax, and high individual income taxes applied to dividend and capital gains income.

Taken in the aggregate, experts say that these factors combine for the most uncompetitive and unfriendly tax structure in the entire OECD group of nations.   

Alexander Anton ([email protected]) is a government relations intern at The Heartland Institute in Chicago.

Internet Info:

“International Tax Competitiveness Index,” Kyle Pomerleau and Andrew Lundeen, The Tax Foundation: http://heartland.org/policy-documents/international-tax-competitiveness-index