A pair of reports were released Monday claiming to rank the most and least fair state tax systems and the most and least competitive international tax systems.
The rankings are certain to provoke disagreement. The first, from the personal finance social network WalletHub, lists what the site considers to be the Most and Least Fair State Tax Systems. WalletHub conducted a nationwide survey to assess what Americans think a fair state and local tax system looks like, and its analysts then ranked the states based on how closely their tax systems matched what the survey respondents considered to be fair.
The survey respondents generally believed that a fair state and local tax system taxes higher-income households at a higher rate than lower-income households. According to WalletHub’s findings, the poor are most overtaxed in Washington, Illinois and Florida, while the middle class is most overtaxed in Arkansas, New York and Hawaii.
Conservatives and liberals who were polled generally agreed on what a fair tax system looks like, WalletHub claims. However, conservatives were more supportive of slightly higher taxes on the poor and lower taxes on the wealthy. While the survey respondents—liberals and conservatives—generally indicated a progressive tax system was the most fair, virtually every state has a regressive state and local tax structure, according to the survey.
States with the Most Fair Tax Systems
3 South Carolina
States with the Least Fair Tax Systems
The other report that was released Monday, from the Tax Foundation, a nonprofit tax policy research organization, found that the U.S. ranks in 32nd place internationally for international tax competitiveness. The Washington, D.C.-based group contended that the United States has the third least competitive tax code among developed nations in the Organization for Economic Cooperation and Development, trailed only by Portugal and France. The Tax Foundation’s 2014 International Tax Competitiveness Index found that Estonia ranked in first place, followed by New Zealand in second place, and Switzerland in third place as having the most competitive tax codes among developed nations.
To compile the index, the Tax Foundation measured the competitiveness of tax systems in the OECD’s 34 countries based on over 40 tax policy variables in five categories: corporate income taxes, individual taxes, consumption taxes, property taxes, and the treatment of foreign earnings.
The U.S. scored poorly in the Tax Foundation’s rankings, largely because it maintains the highest corporate tax rate in the developed world at 39.1 percent. The group pointed out that the U.S. is one of the six remaining countries in the OECD with a worldwide system of taxation. Its poorly structured property, individual, and capital gains and dividends taxes also contribute to the low ranking.
While the statutory corporate tax rate in the U.S. is as high as 39.1 percent, however, many multinational corporations pay far lower effective tax rates, in some cases zero.
With a relatively low corporate tax rate at 21 percent, and no double taxation on dividend income, Estonia enjoys the distinction of having the most competitive tax system in the developed world, according to the Tax Foundation’s ranking. In addition, Estonia’s tax code offers a nearly flat 21 percent individual income tax rate and a property tax that taxes only land (that is, not buildings and structures), the group pointed out.
At the other end of the spectrum, the Tax Foundation claimed that France has the least competitive tax system among developed nations. In addition to having one of the highest corporate tax rates in the OECD at 34.4 percent, France maintains high property taxes and high, progressive individual taxes.
“No longer can a country tax business investment and activity at a high rate without adversely affecting its economic performance,” said Tax Foundation Economist and co-author of the report Kyle Pomerleau, in a statement. “In recent years, many countries have recognized this fact and have moved to reform their tax codes to be more competitive. However, others have failed to do so and are falling behind the global movement.”
The research noted that the last major change to the U.S. tax code occurred 28 years ago as part of the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent in an attempt to make U.S. corporations more competitive overseas. Since then, other OECD countries have followed suit, reforming their tax codes and leaving the United States with one of the least competitive tax codes in the world.
Leaders of Congress’s main tax committees, the House Ways and Means Committee and the Senate Finance Committee, have developed a number of tax reform proposals in recent years for revamping the U.S. tax code, but have failed to pass comprehensive tax legislation so far, although they did agree to extend most of the so-called “Bush tax cuts” when they expired at the end of 2012.
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