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People love rankings. Whether it’s sports teams, colleges or most anything else, people gravitate to that which is labled ‘No. 1’.
When the World Economic Forum released its rankings of the competitiveness of global economies last month, most media coverage focused on the topline results. Switzerland was ranked as the most competitive economy in the world. The United States and Japan were ranked fifth and ninth, respectively.
Being ranked in the top 10 isn’t too shabby. But a deeper look at the WEF’s ranking criteria reveals some interesting coincidences between the two nations that negatively affect their rankings. There are scores of criteria used in the WEF’s formula for measuring economic competitiveness, encompassing everything from the quality of schools and health care to tax codes and the prevalence of government corruption. The rankings also include what the WEF calls “most problematic factors for doing business.”
The top-ranked impediment to competitiveness in Japan is tax rates, which also happens to rank as the second biggest impediment to American competitiveness; tax regulations were ranked No. 1 for getting in the way of the U.S. economy.
This coincidence ought not be surprising. The United States has the highest combined corporate tax rate in the developed world, standing at 40 percent. Japan formerly held the top spot for high taxes until it recently lowered its corporate tax rate. Tax rates are only one of many factors considered in the WEF rankings, but they become exponentially more important in mature, open economies.
All of the nations leading the United States and Japan in the overall ratings have lower and less onerous corporate tax rates. Top-ranked Switzerland has a rate slightly higher than 18 percent, less than half that of the United States and nearly half of Japan’s new, lower rate. The communist nations of China and Vietnam also have lower corporate tax rates.
The fact that tax regulations are the highest ranked problem in this country can’t be ignored.
Part of this lies in the outdated system of corporate taxes on multinational corporations, which are forced to pay multiple layers of taxes on their profits. Because the Unites States hasn’t transitioned to a territorial tax system, American multinationals must pay taxes to the home country on profits earned abroad followed by a U.S. tax if those profits are brought home.
This creates an obvious disincentive for U.S. companies to return foreign-earned profits, effectively placing a cap on the amount of capital available for reinvestment in America. While it’s hard to say precisely what would occur in the U.S. economy were the environment more conducive to bringing overseas profits back to our shores, the potential positive impact on a sluggish economy like ours is self evident.
Americans in particular place a high value on being No. 1. The problem is that the United States is No. 1 in the wrong category — high corporate taxes. If the United States or Japan seek to improve their global standing for competitiveness, they would be wise to take a hard look at whether their tax rates and systems are making their assent in the rankings easier or more difficult.