For decades, the Tax Foundation in Washington, D.C. has educated taxpayers, the media, and policymakers about smart tax policy. And for decades it has focused almost exclusively on the United States’ tax system. In recent years it has expanded its analysis to an international scale. One of the vehicles of such analysis is its annual International Tax Competitiveness Index (ITCI), which seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality.
“The International Tax Competitiveness Index is a tool to help countries around the world realize opportunities for making their tax systems simpler, fairer, and more competitive,” said Daniel Bunn, the Tax Foundation’s director of global projects. “The Tax Foundation stands ready to provide support and analysis for pro-growth tax reform efforts not only in the U.S., but also in Europe and throughout the world.”
This year marks the fifth edition of the ITCI, and Estonia has ranked #1 in all five years. It is followed closely by Latvia (#2), New Zealand (#3), Luxembourg (#4), and the Netherlands (#5). France is — for the fifth year in a row — ranked last, with the least competitive tax system in the OECD.
Belgium and the United States saw the largest improvements in their rankings in 2018. Belgium advanced six places to rank 19th and the U.S. advanced four places to rank 24th. Both countries recently adopted significant tax reform packages. Denmark and Japan both fell three places, to 21st and 26th, respectively, after being surpassed by other countries that have improved their tax codes.
The ITCI draws from more than 40 different factors (including corporate taxes, individual income taxes, consumption taxes, property taxes, and treatment of profits earned overseas) to rank the economic quality of the tax systems of the 35 nations within the Organisation for Economic Co-operation and Development (OECD) representing Europe, Latin America, the Middle East, Asia, North America, and Oceania. The ITCI comprehensively analyzes the five major areas of a nation’s tax system: corporate income tax, personal income tax, consumption taxes, property taxes, and international tax provisions.
According to the Tax Foundation, a competitive tax code is one that keeps marginal tax rates low. In the 21st century, capital is highly mobile and businesses can choose to invest in any number of countries around the world to maximize returns. Often the countries with lower tax rates on investment attract more attention. As countries’ tax rates rise, investment is driven elsewhere and slower economic growth results.
A neutral tax code is one that seeks to raise the most revenue with the fewest economic distortions, meaning that it does not favor consumption over saving, as happens with investment taxes and wealth taxes. This also means few or no targeted tax breaks for specific activities carried out by businesses or individuals. Research from the OECD has found that corporate taxes are most harmful for economic growth, with personal income taxes and consumption taxes being less harmful.
The Tax Foundation has found that tax codes that are competitive and neutral promote sustainable economic growth and investment while raising sufficient revenue for government priorities. The ITCI is a helpful tool for governments in the surveyed countries because it provides a road-map for each of the 35 OECD countries to make their tax systems more competitive.
The Tax Foundation is also currently examining the United States’ recent Tax Cuts and Jobs Act by breaking it down and explaining its impact to the average person with helpful articles and infographics.
View the full International Tax Competitiveness Index 2018.