The United States has the 3rd least competitive tax code in the 34-member OECD (Organisation for Economic Co-operation and Development), trailed only by Portugal and France, according to the 2014 International Tax Competitiveness Index (ITCI; pdf) released Monday by the right-leaning Tax Foundation in Washington DC. The report finds that Estonia (No. 1), New Zealand (2), and Switzerland (3) have the most competitive tax codes among developed nations. Ireland got an 15th ranking.
The US gets a bad grade primarily for its high headline federal corporate tax rate of 35% but companies that have foreign income generally have a much lower rate and Apple's foreign tax rate in fiscal 2012 was 1.9%.
The ITCI attempts to determine which countries provide the best tax environment for investment and business growth and development. It does this by measuring the competitiveness of tax systems in the OECD’s 34 countries based on over 40 tax policy variables in five categories: corporate income taxes, individual taxes, consumption taxes, property taxes, and the treatment of foreign earnings.
The United States scores poorly largely because it maintains the highest corporate tax rate in the developed world at 39.1% (including state taxes) and is one of the six remaining countries in the OECD with a worldwide system of taxation. Its poorly structured property, individual, and capital gains and dividends taxes also contribute to the low ranking.
With a relatively low corporate tax rate at 21%, and no double taxation on dividend income, Estonia enjoys the distinction of having the most competitive tax system in the developed world. Additionally, their tax code has a nearly flat 21% individual income tax rate and a property tax that taxes only land (i.e., not buildings and structures).
On the other end of the spectrum, France has the least competitive tax system among developed nations. In addition to having one of the highest corporate tax rates in the OECD at 34.4%, France maintains high and poorly structured property taxes along with high, progressive individual taxes.
“No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance,” said Kyle Pomerleau, economist and co-author of the report. “In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement.”
The United States is a chief example according to the report. The last major change to the US tax code occurred 28 years ago as part of the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46% to 34% in an attempt to make US corporations more competitive overseas. Since then, other OECD countries have followed suit, reforming their tax codes and leaving the United States with one of the least competitive tax codes in the world.