A country's economic growth is dependent on its tax code's structure. A well-structured tax system is straightforward for taxpayers to comply with and can support economic development while producing sufficient income for a government's purposes. In contrast, economies suffer when poorly designed tax systems lead to higher costs, distorted financial decision-making, and external economic costs.
Due to the global spread of the COVID-19 epidemic, numerous governments have made interim adjustments to their tax policies. Faced with income shortages from the downturn, countries must evaluate how to effectively organise their tax systems to support economic recovery and raise revenue.
The Research Director and Head of Tax at the Centre for Policy Studies have indicated that due to increases in corporation tax and the expiration of the super-deduction, the UK is set to drop to 33rd out of 38 in the overall rankings of the international tax competitiveness index. This marks a significant decline, as the competitiveness of our corporate tax code has fallen by 23 places. Despite these challenges, the UK still maintains the most attractive international tax standards among the members of the Organization for Economic Cooperation and Development (OECD).
The International Tax Competitiveness Index
There is a need to compare and contrast the various taxing systems used by OECD countries because of the wide variety of methodologies used. To this end, we've created the International Tax Competitiveness Index, which ranks the tax systems of OECD nations based on how competitive or neutral they are.
The International Tax Seness Index (ITCI) aims to rank countries based on how closely they follow two fundamental principles of tax policy: neutrality and competitiveness.
Maintaining low marginal tax rates is critical to any competitive tax structure. In today's globalised society, capital is increasingly mobile. Companies can obtain the best possible return on investment in a wide variety of different countries. To increase their after-tax profit, corporations seek out jurisdictions with more favourable tax policies for capital expenditures. If a country's tax rate is excessively high, it will drive investment elsewhere, resulting in weaker economic growth. In addition, high marginal tax rates might hamper domestic investment and contribute to tax avoidance.
A Neutral Tax Law
On the other hand, a neutral tax law prioritises revenue maximisation while minimising economic distortions. This means that, unlike investment and wealth taxes, it does not encourage spending over saving. Furthermore, this means that enterprises and people will receive few if any, targeted tax incentives for engaging in economically productive activities. More complicated tax laws are less neutral. The neutrality of a tax system is compromised if, in theory, the same taxes apply to all enterprises and persons, but, in practice, large businesses or affluent individuals can adjust their behaviour to achieve a tax benefit.
Economic growth and investment are both bolstered by a tax policy that is both neutral and competitive, and this helps the government bring in enough money to fund its priorities. Taxes are just one of many factors that influence a country's economy. However, taxes are critical to the success of every nation's economy.
The note from the Tax Foundation's International Tax Competitiveness Index argues that, in light of the current economic conditions, the Chancellor is justified in prioritizing the reduction of borrowing and enforcing strict fiscal discipline to regain market confidence in the United Kingdom. However, for the long-term economic health of the country, the note urges the Chancellor to focus on measures that will stimulate growth and enhance the UK's competitiveness. Specifically, it recommends reviving former plans by Rishi Sunak for improved capital investment allowances. Previous modeling by the Centre for Policy Studies (CPS) and the Tax Foundation suggests that these measures could significantly boost growth, wages, and employment.
Tax Policy Variables to Determine
The ITCI considers over 40 tax policy variables to determine whether or not a country's tax system is neutral and competitive. Tax rates and tax structure are both quantified by these indicators. Corporate taxes, personal income taxes, consumption taxes, property taxes, and the treatment of overseas profits are all considered by the international tax competitiveness index 2015. The ITCI provides an in-depth analysis of the differences and similarities between the tax systems of industrialised nations, details why some designs are suitable or terrible models for reform, and offers valuable insight into the process of formulating tax policy.
Due to data restrictions, recent tax changes in some nations might not be represented in this year's International Tax Competitiveness Index.
2022 Positions in the Rankings
Estonia has been recognised as having the most favourable tax system within the Organization for Economic Co-operation and Development (OECD) for the ninth year. Four aspects of the tax system contribute to its high ranking. First, only a corporation's retained earnings are subject to tax at a rate of 20%. Second, personal dividend income is exempt from the 20 per cent flat tax on individual income.
Third, unlike property taxes in other countries, only the land value is taxed in this one, not real estate or money. Last but not least, the government uses a territorial tax system that prevents all local corporations from being taxed on their international earnings.
