2022 International Tax Competitiveness Index

Introduction

The structure of a country’s tax code is a determining factor of its economic performance. 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.

Many countries have recognized this and have reformed their tax codes. Over the past few decades, marginal tax rates on corporate and individual income have declined significantly across the Organisation for Economic Co- operation and Development (OECD). Now, most OECD nations raise a significant amount of revenue from broad-based taxes such as payroll taxes and value-added taxes (VAT).1

Not all recent changes in tax policy among OECD countries have improved the structure of tax systems; some have made a negative impact. Though some countries like the United States and France have reduced their corporate income tax rates by several percentage points, others, like Turkey, have increased them. Corporate tax base improvements have occurred in Chile and the United Kingdom, while the corporate tax base has been made less competitive in Belgium.

The COVID-19 pandemic led many countries to adopt temporary changes to their tax systems. Faced with revenue shortfalls from the downturn, countries will need to consider how to best structure their tax systems to foster both economic recovery and to raise revenue.

The variety of approaches to taxation among OECD countries creates a need to evaluate these systems relative to each other. For that purpose, we have developed the International Tax Competitiveness Index—a relative comparison of OECD countries’ tax systems with respect to competitiveness and neutrality.

The International Tax Competitiveness Index

The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality.

A competitive tax code is one that keeps marginal tax rates low. In today’s globalized world, capital is highly mobile. Businesses can choose to invest in any number of countries throughout the world to find the highest rate of return. This means that businesses will look for countries with lower tax rates on investment to maximize their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth. In addition, high marginal tax rates can impede domestic investment and lead to tax avoidance.

According to research from the OECD, corporate taxes are most harmful for economic growth, with personal income taxes and consumption taxes being less harmful. Taxes on immovable property have the smallest impact on growth.¹

Separately, a neutral tax code is simply one that seeks to raise the most revenue with the fewest economic distortions. This means that it doesn’t favor consumption over saving, as happens with investment taxes and wealth taxes. It also means few or no targeted tax breaks for specific activities carried out by businesses or individuals.

As tax laws become more complex, they also become less neutral. If, in theory, the same taxes apply to all businesses and individuals, but the rules are such that large businesses or wealthy individuals can change their behavior to gain a tax advantage, this undermines the neutrality of a tax system.

A tax code that is competitive and neutral promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.

There are many factors unrelated to taxes which affect a country’s economic performance. Nevertheless, taxes play an important role in the health of a country’s economy.

To measure whether a country’s tax system is neutral and competitive, the ITCI looks at more than 40 tax policy variables. These variables measure not only the level of tax rates, but also how taxes are structured. The Index looks at a country’s corporate taxes, individual income taxes, consumption taxes, property taxes, and the treatment of profits earned overseas. The ITCI gives a comprehensive overview of how developed countries’ tax codes compare, explains why certain tax codes stand out as good or bad models for reform, and provides important insight into how to think about tax policy.

Due to some data limitations, recent tax changes in some countries may not be reflected in this year’s version of the International Tax Competitiveness Index.

2022 Rankings

For the ninth year in a row, Estonia has the best tax code in the OECD. Its top score is driven
by four positive features of its tax system. 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 to the value of real property or capital. Finally, it has a territorial

tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

While Estonia’s tax system is the most competitive in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories. Latvia, which recently adopted the Estonian system for corporate taxation, also has a relatively efficient system for taxing labor income. New Zealand has a relatively flat, low-rate individual income tax that also largely exempts capital gains (with a combined top rate of 39 percent), a well-structured property tax, and a broad-based VAT. Switzerland has a relatively low corporate tax rate (19.7 percent), a low, broad-based consumption tax, and an individual income tax that partially exempts capital gains from taxation. Luxembourg has a broad-based consumption tax and a competitive international tax system.

France has the least competitive tax system in the OECD. It has a wealth tax on real estate, a financial transaction tax, and an inheritance tax. The French VAT covers less than 50 percent of final consumption, revealing both policy and enforcement gaps.

Countries that rank poorly on the ITCI often levy relatively high marginal tax rates on corporate income or have multiple layers of tax rules that contribute to complexity. Four of the five countries at the bottom of the rankings have higher than average corporate tax rates. Ireland ranks poorly on the ITCI despite its low corporate tax rate. This is due to high personal income and dividend taxes and a relatively narrow VAT base. In addition, the five lowest- ranking countries have high consumption tax rates, with rates of 20 percent or higher.