Tax Foundation Reveals United States among World's Least Competitive
In more bad news regarding US tax policy, a new report from the Tax Foundation has ranked the United States nearly last on its tax-competitiveness scale. Among Organization for Economic Co-operation and Development (OECD) member states, the United States was ranked 32nd out of 34.
The report dives into the complexities of tax policy, ranking
countries on factors ranging from corporate tax rates to double taxation
of dividends and business income, to property and estate taxes. The
report aggregates a treasure trove of tax data from across the world,
aggregating it into five categories and ranking each country based on
this criteria: corporate tax, consumption taxes, property taxes,
individual taxes, and international tax rules.
Some countries, such as first-ranked Estonia, have solid rankings in each of the categories. Estonia never falls below 11th in any of the observed categories, and ranks first in two: corporate taxes and property taxes. Other countries have exceptional scores in a single category, despite a poor overall score.
The United States and Chile, for example, placed fourth in consumption taxes and fifth in corporate taxes, respectively. Interestingly, the index ranks both Canada (24th) and Mexico (19th) notably higher than the United States in tax competitiveness.
So, what can the United States do to improve its dismal ranking? While there are a number of factors that could well improve its rating, but the most important step the United States could take to reform its international tax competitiveness is to lower the statutory corporate tax rate. The United States has the highest corporate tax rate in the OECD, and one of the highest in the world.
As we have seen with the recent controversy over corporate inversions, this high rate poses a real problem to companies based in the United States. Factoring in the lower corporate rate in Canada, KPMG found total tax costs to be a staggering 46.4 percent lower than in the United States. This latest ranking comes on the heals of Canada lowering its corporate tax rates from roughly 36 to about 26 percent in the last eight years.
In order to maintain competitiveness with our neighbors north of the border, the United States must lower its corporate tax rate substantially. These reforms are a bipartisan issue. As far back as 2012, President Obama proposed dropping the federal corporate tax rate from 35 to 28 percent. While such a reform would be welcome, there has been no movement on the issue thus far, and the president’s proposed 28-percent rate remains too high.
Assuming no changes to state and local rates, such a proposal would continue to have a combined rate of more than 32 percent, leaving the United States still within the bottom four OECD countries.
A more aggressive approach would see the corporate tax rate cut to internationally competitive levels. With the OECD average at around 25.26 percent, that would mean a federal rate of 21 percent, with an additional 4.1 percent coming from state and local taxes. Such a cut, spread over a few years, would not be unheard of, and would follow precedents set by our OECD peers.
From Canada to the United Kingdom, the last 20 years have seen corporate tax rates slashed, as countries vie to undo misguided corporate tax regimes faster than the other.
More realistically, a corporate rate of 25 percent could be a viable
compromise. While rates would remain high, it would still be a
significant improvement. This would place the United States between two
of its three largest trading partners. Such actions would allow some
breathing room for companies that may already be considering relocating
to lower tax jurisdictions abroad.
The US corporate tax regime is among the worst in the world. It is high time that the nation cut its uncompetitive corporate tax rates. While that alone is by no means enough to make the nation truly competitive, it is among the easiest and simplest reforms that could happen.
Addressing issues like worldwide taxation, complex and time-intensive tax compliance, and high property taxes will all be necessary to fix the currently broken system. The most obvious of solutions in lowering the corporate tax rates has already been proven successful by other precedent-setting, friendly nations.
No reform is easy, but of all things that could be done to fix the nation’s tax competitiveness, this may well be the lowest hanging of the low-hanging fruit.
Some countries, such as first-ranked Estonia, have solid rankings in each of the categories. Estonia never falls below 11th in any of the observed categories, and ranks first in two: corporate taxes and property taxes. Other countries have exceptional scores in a single category, despite a poor overall score.
The United States and Chile, for example, placed fourth in consumption taxes and fifth in corporate taxes, respectively. Interestingly, the index ranks both Canada (24th) and Mexico (19th) notably higher than the United States in tax competitiveness.
So, what can the United States do to improve its dismal ranking? While there are a number of factors that could well improve its rating, but the most important step the United States could take to reform its international tax competitiveness is to lower the statutory corporate tax rate. The United States has the highest corporate tax rate in the OECD, and one of the highest in the world.
As we have seen with the recent controversy over corporate inversions, this high rate poses a real problem to companies based in the United States. Factoring in the lower corporate rate in Canada, KPMG found total tax costs to be a staggering 46.4 percent lower than in the United States. This latest ranking comes on the heals of Canada lowering its corporate tax rates from roughly 36 to about 26 percent in the last eight years.
In order to maintain competitiveness with our neighbors north of the border, the United States must lower its corporate tax rate substantially. These reforms are a bipartisan issue. As far back as 2012, President Obama proposed dropping the federal corporate tax rate from 35 to 28 percent. While such a reform would be welcome, there has been no movement on the issue thus far, and the president’s proposed 28-percent rate remains too high.
Assuming no changes to state and local rates, such a proposal would continue to have a combined rate of more than 32 percent, leaving the United States still within the bottom four OECD countries.
A more aggressive approach would see the corporate tax rate cut to internationally competitive levels. With the OECD average at around 25.26 percent, that would mean a federal rate of 21 percent, with an additional 4.1 percent coming from state and local taxes. Such a cut, spread over a few years, would not be unheard of, and would follow precedents set by our OECD peers.
From Canada to the United Kingdom, the last 20 years have seen corporate tax rates slashed, as countries vie to undo misguided corporate tax regimes faster than the other.
The corporate tax rate in the United Kingdom has been slashed over the last four years. (Trading Economics)
The US corporate tax regime is among the worst in the world. It is high time that the nation cut its uncompetitive corporate tax rates. While that alone is by no means enough to make the nation truly competitive, it is among the easiest and simplest reforms that could happen.
Addressing issues like worldwide taxation, complex and time-intensive tax compliance, and high property taxes will all be necessary to fix the currently broken system. The most obvious of solutions in lowering the corporate tax rates has already been proven successful by other precedent-setting, friendly nations.
No reform is easy, but of all things that could be done to fix the nation’s tax competitiveness, this may well be the lowest hanging of the low-hanging fruit.
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