New Zealand has been ranked as the second most competitive country in the OECD for our income tax systems from a commercial viewpoint.
An American interest group called The Tax Foundation has developed an "International Tax Competitiveness Index" that measures the degree to which the 34 OECD countries’ tax systems promote competitiveness through low tax burdens on business investment and neutrality through a well-structured tax code.
The index considers more than forty variables across five categories: Corporate Taxes, Consumption Taxes, Property Taxes, Individual Taxes, and International Tax Rules.
The index attempts to display not only which countries provide the best tax environment for investment but also the best tax environment to start and grow a business.
Estonia was by far the "most competitive" and France the "least competitive" from a business and investment perspective in this 2014 assessment.
The USA is also low on this ranking at #32.
The competitiveness of a tax code is determined by several factors say the surveyers. The structure and rate of corporate taxes, property taxes, income taxes, cost recovery of business investment, and whether a country has a territorial system are some of the factors that determine whether a country’s tax code is competitive, they say.
New Zealand is being held up as a good example of the type of country that has been working to improve its tax competitiveness.
In a 2010 the New Zealand Treasury stated, "Global trends in corporate and personal taxes are making New Zealand’s system less internationally competitive."
In response to these global trends, New Zealand cut its top marginal income tax rate from 38% to 33%, shifted to a greater reliance on consumption taxes, and cut the corporate tax rate to 28% from 30%.
New Zealand added these changes to a tax system that already had multiple competitive features, including no inheritance tax, no general capital gains tax, and no payroll taxes.
Top-ten rankings for consumption, property and individual taxes areas pushed New Zealand to the #2 position.
The International Tax Competitiveness Index seeks to measure the extent to which a country’s tax system adheres to two important principles of tax policy: competitiveness and neutrality.
A competitive tax code is a code that limits the taxation of businesses and investment. In today’s globalised world, capital is mobile. Businesses can choose to invest in any number of countries. This means that businesses will look for countries with lower tax rates on investments in order to maximise their after-tax rate of return. If a country’s tax rate is too high, it will drive investment elsewhere, leading to slower economic growth.
However, low rates are not the only component of a good tax code; a tax code must also be neutral.
A neutral tax code is simply 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.
Another important piece of neutrality is the proper definition of business income. For a business, profits are revenue minus costs. However, a country’s tax code may use a different definition. This is especially true with regard to capital investments. Most countries do not allow a business to account for the full cost of many investments they make, artificially driving up a business’s taxable income. This reduces the after-tax rate of return on investment, thus diminishing the incentive to invest. A neutral tax code would define business income the way that businesses see it: revenue minus costs.
A tax code that is competitive and neutral promotes sustainable economic growth and investment say the authors. In turn, this supposedly leads to more jobs, higher wages, more tax revenue, and a higher overall quality of life.
The authors concede that taxes are not all that matter. There are many factors unrelated to taxes which affect a country’s economic performance and business competitiveness. Nevertheless, taxes affect the health of a country’s economy.
In order to measure whether a country’s tax system is neutral and competitive, the ITCI looks at over 40 tax policy variables. These variables measure not only the specific burden of a tax, but also how a tax is structured. For instance, a 25% corporate tax that taxes true business income is much better than a 25% corporate tax that overstates a business’s income through lengthy depreciation schedules.
The overall index attempts to display not only which countries provide the best tax environment for investment, but also the best tax environment in which to start and grow a business.