On Monday, the Washington-based Tax Foundation released its annual International Tax Competitiveness Index for 2022. They found that the US held steady in 22nd place out of 38 of the world’s top economies.
The annual report ranks the world’s tax codes and is closely watched by US policymakers, especially Republicans, who are likely to regain some power in Washington after next month’s midterm elections.
But the rankings could be shaken in 2023 as parts of President Biden’s Inflation Reduction Act go into effect — and the world’s top economies scramble to implement a groundbreaking global minimum tax deal.
“While it is difficult to say with complete certainty, as other OECD countries may also make changes, the US ranking is likely to decline in the coming years if the US does not address some of the expiring provisions, or the complexity, that new policies of the Inflation Reduction Bring law to US tax law,” Daniel Bunn, executive vice president of the Tax Foundation and author of the report, told Yahoo Finance when the report was released on Monday.
The report looks at 40 different variables, from the worlds of companies to individuals to real estate to consumption taxes – and favors countries that collect revenue in a way that is sufficient for government, but does not hinder the economic sector.
“The structure of a country’s tax law is a determinant of its economic performance,” the report begins, noting that “poorly structured tax systems can be costly, disrupt economic decision-making and harm the domestic economy.”
The US again lagged behind some business-friendly areas such as New Zealand and Switzerland this year, but was ahead of other global powers such as the UK and Italy. American opponents such as China and Russia are not followed by the OECD and do not appear in the rankings.
Where the US ended
Estonia tops the rankings for the ninth year in a row. The tiny Northern European nation is credited in the report with a tax code that, among other things, only taxes corporations on their distributed profits and doesn’t tax personal dividends when looking at individual income taxes. In the eyes of the researchers of the foundation, this structure is optimal to stimulate economic growth while at the same time enabling the government to raise sufficient funds to function.
Due to the way the rankings are structured, the No. 1 country is seen as the country best designed to promote economic development while raising enough to run the government.
At the bottom of the standings, in 38th place, is France. The country was named in Monday’s report because of many features of its tax laws, but mainly because of their wealth tax on real estate. Wealth taxes are seen by many economists as a brake on economic growth and, moreover, they are very difficult to enforce evenly.
About in the middle, again, is the United States. This year’s ranking is identical to the US in both 2020 and 2021. Under the hood, the US was ranked 22nd in corporate tax policy, 21st on individual taxes, 3rd on consumption taxes, 29th on property taxes and 35th on property taxes. are cross-border tax rules.
The rankings are more than just a measure of tax rates. The report also takes into account taxes levied in economically disruptive ways. Under consumption taxes, for example, countries are plagued when their VAT systems apply only to some goods but not others with the idea that an evenly applied sales tax would not change consumer behaviour.
Changes coming in 2023
The rankings released this week are for the 2022 tax landscape. But the Inflation Reduction Act and other changes out of Washington DC are sure to change things next year.
The new law, signed by President Biden in August, will introduce a new minimum corporate tax rate of 15% for companies that have made more than $1 billion in book profits. The new law also adds a new 1% tax on share buybacks.
Both provisions will enter into force on January 1, 2023.
Bunn is concerned that the new corporate tax minimum could make the US less competitive and also that a key provision of the Tax Cuts and Jobs Act of 2017 will expire and hurt US competitiveness.
That provision provides businesses with full equipment expenses and will begin to phase out in 2023. The foundation previously called it ‘the most important temporary tax provision’. But the Biden administration and Democratic lawmakers have shown little interest in renewing it.
In addition, the US and other countries recently agreed on a new global minimum tax agreement that would ensure that companies pay a minimum rate of 15%, regardless of where they operate. Proponents of the deal’s ambitious goal have had it come into effect in 2023, leaving many countries struggling to comply with the new rules.
Ben Werschkul is a Washington correspondent for Yahoo Finance.
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