by Julie Tisdale
City & County Policy Analyst
The Tax Foundation has a new report out today, and it’s not exactly great news for the US. According to their International Tax Competitiveness Index for 2014, the US ranks 32nd out of 34 countries in the OECD. This is a group of the world’s most developed economies – most of Europe, North America, Australia, New Zealand, Japan, Korea, Chile, Israel, and Turkey. They’re the countries with which we compete most directly. So having an uncompetitive tax regime is a problem.
And we’re not just a little bit behind. Estonia, which ranked #1, scored 100 on this index. We scored 45.
What makes us so uncompetitive? Well, it’s a combination of things. According to the Tax Foundation:
We did poorly in pretty much every area, too. In Corporate Tax, Property Taxes, Individual Taxes and International Tax Rules, we were 26th or lower. Only in Consumption Taxes did we do relatively well, at 4th.
The Wall Street Journal summed it up well.
A competitive tax code is one that limits the taxation of businesses and investment. Since capital is mobile and businesses can choose where to invest, tax rates that are too high “drive investment elsewhere, leading to slower economic growth,” as the Tax Foundation puts it.
By neutrality the foundation means “a tax code 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 capital gains and dividends taxes, estate taxes, and high progressive income taxes. This also means no targeted tax breaks for businesses for specific business activities.” Crony capitalism that rewards the likes of green energy with lower tax bills while imposing higher bills on other firms is political arbitrage that misallocates capital and reduces economic growth.
At the Locke Foundation, we’ve been saying this for years. In particular, in a Spotlight report published today, Roy Cordato argues for major reforms to the capital gains tax in North Carolina for precisely these reasons. Not only does the US need to compete internationally, but North Carolina needs to compete within the United States. Our tax regime, including our capital gains tax system, doesn’t help us to do that.