According to research conducted by the Tax Foundation (ITCI), in 2018 Estonia has again topped the International Tax Index competitiveness. This index is arranged by the Organization for Economic Co-operation and Development (OECD). The highest rating is given to the country with the lowest tax rate and the least amount of taxes.
Over 40 indicators are evaluated for research — corporate and individual taxes, consumption taxes, property taxes, and profits earned from abroad. Tax rates including the structure of taxes are also taken into consideration. The study concluded that the competitiveness of the tax system is determined by the size of tax rates and that high tax rates harm the country’s economic growth.
The current economic situation is very competitive — companies have a choice to decide where and how much to invest, and seek for countries with lower taxes to increase their income. High taxes are not profitable for business. Many countries have already reduced corporate taxes and individual incomes or on the way to this, and the majority get the most of their income from taxes on wages and value added taxes — VAT. The neutrality of the tax system creates an increase in budget revenues with least state intervention in the activities of companies. The tax system should not prefer consumption savings, as is the case with investment and luxury taxes. Neutral tax system contributes to economic growth.
Factors that helped Estonia take leading positions: 20% corporate rate tax that applies only to distributed profits; 20% same tax on income of individuals, which does not apply to income from dividends; tax on a property that only covers the value of the land, not the value real estate or capital; territorial taxation system which exempts 100% of foreign profits of domestic companies from domestic taxation with some restrictions.
Countries that made the top 5 included New Zealand, Switzerland, Latvia, and Luxemburg. The least competitive tax system was French.