Comparing tax codes from around the world

How a country sets up its taxation by way of structuring tax codes is an important indicator of economic performance.

In general, a well-structured tax code is straightforward for taxpayers to comply with: it enables economic development to flourish and raises adequate revenue to meet a government’s needs regarding investment in infrastructure and services. Poorly structured tax set ups can be expensive and eventually harm economies.

Less personal and corporate tax

In general terms, countries in the Organization for Economic Co-operation and Development (OECD) including the US are reducing the tax burden at source on individuals and corporations, so the W-2, 1099 and other tax forms generated byUS businesses and organizations are generating less tax payable by individual staff and contractors.

Instead, tax is being raised more through avenues such as VAT and payroll.

More investment and spending

For business, reducing the corporation tax burden promotes investment and a possibility of foreign enterprises ‘setting up shop’ in the country concerned. Plus, individuals with more money to spare through being taxed less on their income may be inclined to spend more – which, in turn, increases investment in their locality and in US generally.

How countries rank

The International Tax Competitiveness Index (ITCI) looks to measure how a nation’s taxation system reflects its tax policy by way of neutrality and competitiveness.

Competitive taxation recognizes how easy it is – thanks to more fluid and flexible money movements – for businesses to invest wherever it’s most advantageous. They won’t invest where taxation rates are too high so economic growth in nations with higher tax will suffer. The OECD found that higher cooperation tax is the most detrimental to growth.

A neutral tax code raises the most revenue without ‘economic distortions’ such as, say, having heavy wealth or investment taxes.

Higher ranking nations

In 2019 Estonia topped the ITCI for the sixth year in a row: its flat 20 per cent tax on corporate and individual income respectively, a property tax applying just to land value rather than property, and full domestic tax exemption of foreign profits earned by its corporations sees to that.

Other countries scoring high include New Zealand in second place, thanks to its low rate individual taxes and capital gains exemptions, and Latvia which adopted the Estonian corporate taxation model.

Switzerland rides high in the rankings in fifth due to low corporation tax rates (just over 21 per cent) and personal taxation that exempts capital gains.

Lower ranking nations

At the other end of the scale, France props everyone else up, sitting bottom of the ITCI for the sixth year running. That’s due to its high corporation tax at 34.4 per cent,coupled with high property taxation, wealth taxes and a highish personal tax rate. In return for this France spends the most on welfare and other social aspects of all countries in the developed world.

Overall, countries languishing near the bottom of the ITCI including Italy, Portugal, Chile, Israel and Greece impose higher than average corporate taxation rates except for second from bottom Poland.

The US sits just below halfway in the ITCI rankings in 21st place out of the 36 countries; the same as in 2018 but a decent rise of seven places from its 2017 ranking of 28th. 

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