Tax Code Competitiveness | Tax Policy Across the OECD

Policymakers often assume they must choose between collecting high levels of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue and maintaining a competitive tax system. However, comparing developed countries’ tax collections to their results in the International Tax Competitiveness Index (ITCI) suggests that this trade-off is overstated, as policymakers often have opportunities to improve the structure of their tax systems and raise their tax competitiveness without sacrificing significant revenue.

Across developed economies, there is no clear relationship between how much revenue governments collect and how well their tax systems are structured. Contrary to popular belief, even countries with relatively high tax burdens can maintain high tax competitiveness, while some low-revenue countries operate inefficient and distortionary tax systems. Their results in the ITCI are not primarily driven by how much they tax but by how efficiently they tax.

The Weak Link Between Revenue and Competitiveness

The International Tax Competitiveness Index evaluates OECD tax systems based on two principles: competitiveness (how well the tax system encourages investment and economic activity) and neutrality (how little the tax system distorts economic decisions). It covers more than 40 variables across corporate, individual, consumption, property, and cross-border tax rules.

If tax competitiveness simply reflected low tax collections, we should expect a clear negative relationship between countries’ tax-to-GDP ratios and their ITCI scores. Instead, there are only weak patterns.

The three highest-ranking countries—Estonia, Latvia, and New Zealand—are alike in their tax collections, clustering close to the OECD average of 34 percent. Meanwhile, countries across a wide range of revenue levels appear throughout the rankings. Some countries with tax-to-GDP ratios above 40 percent rank in the upper half of the ITCI, while some countries with low tax collections rank near the bottom.

Efficient Structure at Average Revenue Levels

Estonia (1^st), Latvia (2^nd), and New Zealand (3^rd) illustrate how the most competitive tax systems in the OECD can coexist with average revenue collections.

All three rely on broad-based consumption taxes and relatively efficient income tax systems. Estonia and Latvia tax corporate profits only when distributed to shareholders, leaving retained earnings untaxed and making business taxation simple and efficient. Their corporate tax rates lie below the OECD average and avoid additional layers of dividend or withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount the employee requests. taxes.

New Zealand applies its broad-based goods and services tax (GST) at a low rate of 15 percent to nearly all final consumption. Estonia and Latvia likewise maintain broad value-added tax (VAT) bases, covering 70 and 65 percent, respectively, well above the OECD average of 55 percent. All three countries avoid highly distortionary capital taxes that raise low levels of revenue, such as net wealth taxes, financial transaction and property transfer taxes, capital duties, or estate and inheritance taxes. Estonia’s property taxes only apply to the value of land, excluding built structures.

These design choices substantially reduce economic distortions and compliance costs while collecting as much tax revenue as the OECD average.

High-Tax Countries Don’t Need to Be Uncompetitive

The Scandinavian countries demonstrate a different pattern. Denmark (27^th), Norway (21^st), and Sweden (11^th) have some of the highest tax-to-GDP ratios in the OECD, exceeding 40 percent. Nevertheless, their scores for tax competitiveness do not automatically rank at the bottom; rather, they range widely from the lower middle to the upper third of the ITCI.

These countries fund much of their high government spending through broad-based taxes on consumption and labor income while maintaining corporate tax rates below the OECD average. Their high VAT rates of 25 percent cover comparably broad consumption bases, and VAT registration thresholds lie at a small fraction of the OECD average, avoiding costly distortions. Top personal income tax rates in the Scandinavian countries tend to be high, exceeding 55 percent in Denmark, though they apply to a broad base with top rate thresholds between 1.1 and 1.8 times the average wage.

There are some key differences between the Scandinavian countries that account for their different ranks on the ITCI. Norway is one of four countries to levy a harmful net wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. on top of a high capital gains tax, but it can afford to maintain high spending and lower income tax rates than the two countries, thanks to high revenues from its oil reserves. Sweden largely ranks the best among the group because it levies the lowest tax rates on corporate income, dividends, and capital gains among the group, offers above-average capital cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. provisions for investment, and levies no estate or inheritance taxAn inheritance tax is levied upon the value of inherited assets received by a beneficiary after a decedent’s death. Not to be confused with estate taxes, which are paid by the decedent’s estate based on the size of the total estate before assets are distributed, inheritance taxes are paid by the recipient or heir based on the value of the bequest received.. Denmark levies one of the highest dividend and capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.  rates in the OECD, at 42 percent, making it difficult to build household savings outside of tax-preferred savings accounts.

The Scandinavian experience shows that high levels of tax revenue do not automatically entail poor tax competitiveness. Countries can sustain high public spending while relying on comparatively broad and neutral tax bases such as labor income and consumption. However, all these tax systems still contain structural inefficiencies to varying degrees and could make substantial improvements to their tax codes.

Poor Structure Harms Both High- and Low-Revenue Countries

The lowest-ranking countries in the ITCI further illustrate that weak competitiveness is not confined to high-tax economies. France (38^th) and Italy (37^th) are among the OECD countries collecting the highest tax revenues as a share of GDP, above 40 percent and on par with the Scandinavian countries, while Colombia (36^th) has one of the lowest tax-to-GDP ratios, below 20 percent. Despite these differences, all three combine high corporate tax rates with narrow VAT bases, stringent cross-border rules, and multiple distortionary capital taxes.

Corporate tax rates in these countries exceed the OECD average of 24.2 percent in 2025, with France levying the highest combined top rate at 36.1 percent, including multiple surtaxes and distortive production taxes. Colombia follows closely at 35 percent.

The tax codes of the bottom three countries are layered with numerous taxes on bank and business assets, estates and inheritances, financial transaction taxes, property transfer taxes, and, in Colombia’s case, a comprehensive net wealth tax.

Their VAT bases are narrow, covering 38.5 percent of final consumption in Colombia, 43.3 percent in Italy, and 50 percent in France, compared to an OECD average of 55 percent.

Colombia’s low overall revenue reflects an extremely narrow personal income tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. that includes only a small set of high-income earners and raises only 2.2 percent of GDP as revenue. In contrast, both France and Italy raise about 24 percent of GDP from personal income taxes and social contributions. With limited revenue from labor income, Colombia depends disproportionately on economically harmful taxes with highly mobile bases, such as corporate income.

These examples show that both high- and low-revenue countries can operate uncompetitive tax systems when they erode their consumption and labor income tax bases and employ highly distortive capital taxes.

Improving Tax Design Without Reducing Revenue

The weak link between tax collections and tax competitiveness highlights an important distinction. Policymakers often assume that improving competitiveness requires a trade-off between reducing distortionary taxes and collecting less revenue. That trade-off is real, especially in the short run. As governments keep exhausting their least distortive means of raising revenue, the economic costs of taxation rise together with the tax burden.

However, many countries still raise revenue in ways that create a lot of unnecessary friction, leaving room to improve tax competitiveness and generate economic growth without reducing revenues.

Structural reforms can make their tax codes more competitive by eliminating distortive tax incentives and capital taxes, improving capital cost recovery, and shifting the tax burden towards broader and less mobile bases, such as consumption and land.

Share this article

Twitter
LinkedIn
Facebook
Email