We'll bet you won't guess which country is the most competitive on taxes
The Tax Foundation released its 2018 International Tax Competitiveness Index, which you can download here.
The International Tax Competitiveness Index (ITCI) seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. The ITCI points to the fact that the OECD itself has recognised that corporate taxes have the most negative impact on economic growth. However, the index also analyses individual taxes, consumption taxes (known in Europe as VAT=value added tax), property taxes, and international taxes. In order to establish a ranking, the index does not only look at how high taxes are, but also at how they are structured. It produces an overall rating for a country, and the subdivides into the different categories on taxes, enumerated earlier.
Here are the first five countries when it comes to tax competitiveness:
The ITCI gives three reasons for Estonia's first place:
it has a 20 percent tax rate on corporate income that is only applied to distributed profits
it has a flat 20 percent tax on individual income that does not apply to personal dividend income
its property tax applies only to the value of land, rather than to the value of real property or capital
More interestingly, Estonia has been at number one of the Tax Foundation's index for the last five years.
During his acceptance speech for the 2006 Milton Friedman Prize for Advancing Liberty, former Prime Minister of Estonia, Dr. Mart Laar, explains the difficulties he initially faces when instituting the country's flat tax system. He was told that it couldn't be done, or that it couldn't possibly work, and yet Estonia has found its way to prosperity.
As someone who has personally met Mart Laar this year, during LibertyCon in Washington D.C, I can confirm he is very humble about the things Estonia achieved. He doesn't take credit for an achievement, because he believes that everything that was done could only be done through ordinary workers, not through government bureaucrats. It is in fact much in the sense of what former German Chancellor Ludwig Erhard, who significantly deregulated the German economy in the 1950s, said about the so-called "Economic Miracle":
"What has taken place in Germany … is anything but a miracle. It is the result of the honest efforts of a whole people who, in keeping with the principles of liberty, were given the opportunity of using personal initiative and human energy."
However, Mart Laar has a certain discrete smugness when he points out that despite their initial opposition, other political factions have, over time, never gotten rid of the system he instituted.
Countries such as Luxembourg and Switzerland, currently battling with the EU and the OECD over tax rulings, should look to Estonia to find a viable alternative in flat taxes.
What they should do is implement a low-tax regime, in the image of countries such a Estonia. Taxes on distributed profits in the Baltic country are 14-20% and hardly disputed within the EU. In fact, a 10% flat tax on corporate profits would reduce bureaucracy for companies and satisfy those on the political left who have been arguing for higher taxation of multinational companies. And it would be a highly competitive rate within both the EU and the OECD, who'd have full transparency on the tax practices.
As the ICTI shows, simplicity is the key to success.