Where Do Canada And The United States Rank On Global Tax Competitiveness?

The nonpartisan nonprofit Tax Foundation has released its 2022 International Tax Competitiveness Index, which provides a comprehensive comparison of developed countries’ tax codes and explains why certain tax codes are better than others. The index also offers options to improve the tax climate for businesses.

The index examined more than 40 variables across both tax rates and tax structure to measure the extent to which a country’s tax system adheres to two important aspects of principled tax policy: competitiveness and neutrality.

The United States ranked 22nd. Canada ranked 16th. The Tax Foundation said the United States’ ranking could fall quickly, however, if federal lawmakers don’t step in.

As Connecting the Dots reported last week, unless Congress acts before the end of 2022, a tax code provision will take effect that requires businesses to amortize or deduct their research and development (R&D) expenses over a period of years versus being able to fully deduct the cost of R&D the same year.

This provision would be especially difficult for manufacturers, who perform nearly 58 percent of private sector R&D. Metals Service Center Institute (MSCI) joined the National Association of Manufacturers (NAM) and dozens of other organizations in sending a letter to Democratic and Republican leaders of the U.S. House and Senate asking that they bring up legislation that would eliminate this harmful policy which, if fully implemented, would erode manufacturing industry innovation.

The R&D provision isn’t the only thing threatening U.S. competitiveness.

Also contributing to the United States’ perilous position is the fact that the Inflation Reduction Act’s (IRA) new and complex corporate minimum tax will soon take effect and in 2024 and 2025, deductions for equipment will be limited even further until full expensing phases out completely in 2026. Taxes also will increase on foreign profits and certain profits connected to exports.

The Tax Foundation estimates that if the changes due to the Inflation Reduction Act and the reduced deductions for investment were reflected in the 2022 version of the index, the U.S. would slip to 24th place.