Tax Competitiveness Report Brands US 'High Tax' Economy

by Mike Godfrey, Tax-News.com, Washington

22 September 2006

The US and Canada share the spotlight with such countries as the Republic of Congo, China, Brazil and Germany in having some of the highest effective tax rates on capital among 81 developed and developing countries, according to a study by the CD Howe Institute, the Canadian conservative think tank.

The 2006 Tax Competitiveness Report scores 81 developed and developing countries according to their tax treatment of business investment. The study was co-authored by Jack M. Mintz, Professor of Business Economics, Rotman School of Management at the University of Toronto and Fellow-in-Residence at the Institute and Duanjie Chen, George Weston Tax Analyst at the Institute.

According to its conclusions, highly taxed Canada ranks a disappointing 8th, while the "investment-hostile" Republic of Congo ranks first. However, it found that the US ranks among the most heavily burdened, with an effective tax rate on capital of 38%, above its neighbours Canada at 36.6% and low-tax Mexico at 13.8%.

The study also came to the somewhat surprising conclusion that China has the second highest effective tax rate at 47%, largely driven by its non-refundable 17% value-added tax applied to purchases of machinery. This falls to 18% however, when account is taken of VAT refunds on machinery which are offered by some provincial governments to attract investment.

Argentina, Brazil and Germany complete the top five in the list of tax-burden "bad boys."

Unsurprisingly, the most tax-favoured jurisdictions include Hong Kong at 6.1%, Singapore at 11.5% and Ireland at 14%, reflecting their low corporate income tax rates.

Belgium has the lowest effective tax rate on capital amongst all 81 countries at -4.4%, resulting from the introduction of a notional deduction for equity financing. With both bond and equity financing deductions, Belgian companies are able to claim a higher tax value of deductions compared to the tax levied on income earned from investments, the study noted.

"The US certainly looks like a high-tax country when it comes to business taxation," Chen and Mintz noted, agreeing with the conclusions of the Presidential tax reform panel that the US corporate tax system is "a major barrier to investment and growth, degrading other strengths of the US economy."

"Instead of using the tax system to interfere with economically sound business decisions, it would be much better to have a broadbased neutral corporate income tax with low rates to create a better business environment. Simplification would make it easier for taxpayers to comply with the system and for the IRS to administer the tax system," they observed.

"The saving in compliance and administrative costs would be good for the US economy as well," they added.

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