As Congress attempts to undertake a major overhaul of the tax system, it makes sense to take into perspective where the U.S. ranks globally. According to the Tax Foundation, America’s ranking is nowhere near the top. In fact, the ranking is close to the bottom: The U.S. tax code is placed 30th out of 35 countries evaluated.
The 2017 International Tax Competitiveness Index considers the ranking of corporate, consumption, individual, property and international tax rules in deriving an overall score and ranking for countries in the Organization for Economic Cooperation and Development (OECD).
Based on that criteria, the U.S. overall score is 55.1, only ahead of Poland, Chile, Portugal, Italy and — lastly — France.
For the fourth consecutive year, Estonia ranks first with a score of 100, and it also ranks first in corporate and property taxes. The corporate tax ranking of the U.S., on the other hand, ranks last while its property taxes rank 29th.
According to the Tax Foundation, marginal tax rates on corporate and individual income have dropped substantially and most nations now raise a good deal of their revenues from broad-based taxes, such as payroll and value-added taxes.
The U.S., however, hasn’t cut its federal corporate income tax rate from 35 percent since the early 1990s. That makes its combined federal, state and local corporate tax rate of about 39 percent substantially higher than the OECD average of 25 percent.
Most OECD countries also have adopted a territorial tax system, while the U.S. still taxes the worldwide profits of its domestic companies.
Therefore, the index measures how well a country’s tax system follows two aspects of tax policy: competitiveness and neutrality, according to the Tax Foundation.
A competitive tax code keeps marginal tax rates low, according to the Tax Foundation. High marginal rates can bring tax avoidance and slow economic growth by driving investments to other areas.
A neutral tax code raises the most money with the least number of economic distortions, the Foundation states. It doesn’t favor consumption over savings, and there are few or no targeted tax breaks for activities of businesses or individuals.
So let’s look at Estonia. According to the Tax Foundation, it has a 20 percent corporate tax rate that is only applied to distributed profits. Its flat 20 percent tax on individual income doesn’t apply to personal dividend income. The property tax applies only to the land value, not to the value of real property or capital. And, its territorial tax system exempts all foreign profits earned by its domestic corporations from domestic taxation, with few restrictions.
Of the 35 countries, here are the top 10 and their overall scores:
- Estonia (100)
- New Zealand (88.7)
- Switzerland (85.2)
- Latvia (85)
- Luxembourg (82.7)
- Sweden (81.8)
- Australia (78.9)
- Netherlands (77.5)
- Czech Republic (74.3)
- Slovak Republic (74.1)
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.