German economists, Sara Keller and Deborah Schanz, have created a tax attractiveness index (see Measuring Tax Attractiveness Across Countries). The index, using attributes from the tax environment and tax planning opportunities, covers over 16 components of corporate tax systems within each country and then ranks them accordingly.
“They [the economists] look at statutory tax rates, how dividends and capital gains are treated, withholding taxes, group tax regimes and more. They consider double tax treaties, thin capitalization rules, and controlled foreign company rules.”
The authors of the index look at the 100 countries’ corporate tax systems from 2005-2009 and then painstakingly quantify each tax factor. The index is useful, for it takes into consideration more than just the statutory tax rate. Instead, it considers all the other policies that impact the actual tax burdens on companies.
“[L]isted nations are in alphabetical order, so it’s not very user-friendly if you want to make comparisons. But a simple rule-of-thumb is that any score about .6000 is relatively good and any score below .4000 suggests a country is shooting itself in the foot.”
Oddly enough, the rankings show that high tax countries can offer favorable tax conditions. The United Arab Emirates (UAE) is the only country that tops the U.S. in having a higher corporate tax rate; however, the ranking’s other variables reveal that the UAE has one of the most attractive corporate tax systems as opposed to the U.S.
As you can see from the top 10 and bottom 10 jurisdictions on the list, the U.S. (94/100) does not fare well at all in this index. It falls behind economically lagging countries such as Zimbabwe and Japan. Furthermore, the index takes into account the years 2005-2009 so some countries have moved up and down since then. For example, it is highly likely that Cyprus has fallen from its top 10 ranking in this index due to its current economic turmoil.
Interestingly also, Daniel Mitchell, a tax expert at the Cato Institute, notes that since financial privacy laws are not part of the equation, tax-haven countries dominate the top of the list. He also points out that while an attractive corporate tax system is awesome, there are a dozen other factors which determine a country’s competitiveness and prosperity.
“It is important to also look at other tax policies and the overall burden of government spending to gauge a nation’s fiscal policy, you also need to look at other big factors such as monetary policy, trade policy, and regulatory policy.”
Indeed, the Economic Freedom of the World rankings look at fiscal policy and give a better look at these additional factors.” As such, even though it’s galling that the American corporate tax system ranks below France (and Italy, Greece, Ukraine, Nigeria, etc), the United States fortunately does better in most other areas.”
However, what is concerning is that, in the Economic Freedom of the World rankings, the U.S. has fallen from 3rd under President Clinton to 18th in the most recent rankings.
- U.S. Tax System Ranks 94th Out Of 100—Right Below Zimbabwe (forbes.com)
- TaxProf Blog: Tax Attractiveness Index: U.S. Is Ugly Betty (95th of 100 Countries, Right Below Zimbabwe) (cg68doc.newsvine.com)
- Study: Large Corporations Had Tiny Tax Bills.. So What’s All The Fuss About? (joyoftaxlaw.com)
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