November 2016

United States vs. The World

By Amy K. Frantz

There are many state tax rankings out there that compare tax systems, state to state, but how does our country, the United States, stack up against other developed nations in the world? Tax Foundation has recently published its 2016 International Tax Competitiveness Index, and the United States is not looking too good.

Tax Foundation looks at several areas in determining rankings; corporate tax, consumption taxes, property taxes, individual taxes, and international tax rules. The author of Tax Foundation’s report, Kyle Pomerleau, highlights the type of tax systems that receive high and low marks.  “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.”

Unfortunately, the United States ranks near the bottom, coming in at #31 out of 35 developed countries. Our low rank comes, in part, from having one of the highest corporate tax rates in the world.  In addition, writes Pomerleau, “The United States has continued to tax the worldwide profits of its domestic corporations.”

So which countries are at the top of the list? Estonia ranks #1 and New Zealand ranks #2 on Tax Foundation’s Index.  This is Estonia’s third year in a row at the top of Tax Foundation’s rankings, and as Pomerleau explains, Estonia’s “top score is driven by four positive features of its tax code.  First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits.  Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income.  Third, its property tax applies only to the value of land rather than taxing the value of real property or capital.  Finally, it has a territorial tax system that exempts 100 percent of the foreign profits earned by domestic corporations from domestic taxation, with few restrictions.”

New Zealand, which comes in second, has made recent changes in its tax system that improved its ranking. Pomerleau shares that “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.”

The United States should look to the examples of Estonia and New Zealand when considering tax reforms. Improving our tax system will make it more user-friendly for tax-paying citizens, will help improve our nation’s economic performance, and will increase our ranking on the International Tax Competitiveness Index.

Amy K. Frantz is Vice President of Public Interest Institute. 

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.