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U.S. Ranked 32nd in OECD on Taxes? That's Not Very Competitive

Sep 15, 2014

The Tax Foundation has released the International Tax Competitiveness Index, a new ranking of "tax competitiveness" for the 34 countries that make up the Organization for Economic Cooperation and Development (OECD). The key to a good ranking? Low tax burdens on business investment and neutrality through a well-structured tax code.

The United States ranks a sad 32nd (take that Portugal and France!), admittedly no surprise given our high tax burdens on business investment and the miserably structured tax code. From the Tax Foundation:

The United States provides a good example of an uncompetitive tax code. 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. 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.

While the corporate income tax rate is a very important determinant of economic growth and economic competitiveness, it is not the only thing that matters. The competitiveness of a tax code is determined by several factors. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive.

The Foundation cites New Zealand as a country that modernized its tax system to improve global competitiveness, lowering its corporate tax rate and switching from an antiquated worldwide system of taxation -- upon which the United States still depends -- to a territorial system in which earnings are taxed in the country where they are made. New Zealand ranks No. 2 in global tax competitiveness, behind No. 1 Estonia.

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The new index comes as the White House and Senate Democrats offer proposals they say will curb "tax inversions," in which U.S.-based corporations merge with foreign companies and relocate their legal presence to the new country, thereby avoiding the deleterious U.S. taxation of foreign earnings. (Even with inversions, taxation of U.S. earnings remain the same.)

Bob Greifeld, CEO of NASDAQ, was asked about inversions and tax policy in a Bloomberg-TV interview by Trish Regan. Inversions are just a symptom of deeper problems with the U.S. tax system, he said: "We have to make sure that we solve the problem: The problem is our corporate tax rate is too high. We need to eliminate some loopholes and lower the nominal rate."

And, making a point that is too rarely reported, Greifeld warned against the unintended consequences of ad hoc tax policy. Regan asked: What is the impact of these efforts to limit corporate tax flexilibity? Greifeld: 

It changes the future. When you start a company, you can really start it anywhere. So if you recognize that this is the Hotel California, that you can never check out, you can start your operation in Canada. You can have all your people in the U.S, but now your’e a Canadian company.

What I really worry about is, especially when I talk to young growing companies, they say, “If I was to start my company today, I wouldn’t do it in the U.S., because I know they’re going to put these restrictions on me that other countries do not.”
 

 

 

 

 

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