The American tax system is antiquated and broken. You know that, and you’ve heard that cry from business leaders and politicians on both sides of the ideological divide, but a new global benchmarking study from the Right-leaning Tax Foundation gets at just how desperately the tax code needs to be fixed. The study finds that the U.S. system is the third least competitive among the world’s advanced economies, right behind Spain and Italy and ahead of only Portugal and France.
The Tax Foundation researchers looked at the tax systems of the 34 countries in the Organization for Economic Cooperation and Development, the Paris-based research forum for the world’s leading economies. They examined individual taxes, consumption taxes, property taxes, corporate taxes and how foreign earnings are treated across the 34 countries.
Their report says that the tax codes of Estonia, New Zealand and Switzerland are now the most competitive. The U.S. suffers because of its high nominal corporate tax rate of 35 percent and because it is one of six countries in the OECD that doesn’t have a territorial tax system, which would exempt companies from paying taxes on profits earned outside the U.S.
|2014 International Tax Competitiveness Index Rankings|
|Country||Overall Score||Overall Rank||Corporate Tax Rank||Consumption Taxes Rank||Property Taxes Rank||Individual Taxes Rank||International Tax Rules Rank|
|Source: Tax Foundation|
“The last major change to the U.S. 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 percent to 34 percent in an attempt to make U.S. corporations more competitive overseas,” the authors write. “Since then, the OECD countries have followed suit, reducing the OECD average corporate tax rate from 47.5 percent in the early 1980s to around 25 percent today. The result: the United States now has the highest corporate income tax rate in the industrialized world.”
Based on the Tax Foundation’s criteria, the U.S. also gets hit for having an estate tax and what the authors call “poorly structured state and local property taxes” as well as a “a relatively high, progressive individual income tax” that covers dividends and capital gains, even though those forms of income are taxed at a far lower rate.
Keep in mind that the rankings here are based on two key principles espoused by the Tax Foundation: “competitiveness” and “neutrality.” The group defines a competitive tax code as one “that limits that taxation of business and investment.” In other words, lower is better. A neutral code, meanwhile, “seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with capital gains and dividends taxes, estate taxes, and high progressive income taxes. This also means no targeted tax breaks for businesses for specific business activities.”
And that’s precisely why the push for tax reform has gone nowhere: Even though Democrats and Republicans agree broadly on the need to lower tax rates and close loopholes, it’s much harder to find agreement on precisely which “distortions” to eliminate and which behaviors the tax code should encourage or discourage.
In the meantime, even with the desperate need for a better tax system, the U.S. fared pretty well in another recent report looking at global competitiveness. In the World Economic Forum’s recently released Global Competitiveness Rankings for 2014-2015, the U.S. ranked third, up from fifth last year.
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