Paul L. Caron

Wednesday, July 10, 2013

Tax Attractiveness Index: U.S. Is Ugly Betty (95th of 100 Countries, Right Below Zimbabwe)

Sara Keller (WHU, Otto Beisheim School of Management) & Deborah Schanz (Ludwig-Maximilians-University Munich), Measuring Tax Attractiveness Across Countries:

This paper develops a new tax measure – the Tax Attractiveness Index – reflecting the attractiveness of a country’s tax environment and the tax planning opportunities that are offered. Specifically, the Tax Attractiveness Index covers 16 different components of real-world tax systems, such as the statutory tax rate, the taxation of dividends and capital gains, withholding taxes, the existence of a group taxation regime, loss offset provision, the double tax treaty network, thin capitalization rules, and controlled foreign company (CFC) rules. We develop methods to quantify each tax factor. The Tax Attractiveness Index is constructed for 100 countries over the 2005 to 2009 period. Regional clusters in the index as well as in the application of certain tax rules can be observed. The evaluation of individual countries based on the index corresponds – but is not totally identical – with the OECD’s ‘black’ respectively ‘grey’ list. By comparing the Tax Attractiveness Index with the statutory tax rate, we reveal that even high tax countries offer favorable tax conditions. Hence, the statutory tax rate is not a suitable proxy for a country’s tax climate in any case since countries may set other incentives to attract firms and investments.


(Hat Tip: Bruce Bennett.)

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Do not confuse "attractive" with "good."
"Attractiveness", as the authors explain at page 6 of their paper, "[C]orresponds with the ‘black’ respectively ‘grey’ list published by the OECD (see OECD 2000, 2009), that is, countries which are perceived as being harmful by the OECD reach significantly higher index values than others." Tax havens are "attractive", with Bahamas, Caymans, BVI and Bermuda scoring near the top.

Posted by: Gwailo | Jul 13, 2013 11:27:57 PM

I think the index is quite useless. Pack your bags and move to Russia from the USA? That's what the index would suggest. But I wouldn't do that if I were to value being able to keep what I might earn -- or even to keep out of prison.

Posted by: jmike | Jul 11, 2013 11:42:01 AM

As it stands, the table itself could be a more powerful presentation.
This might help:
The table should be recreated as a list with countries in order of attractiveness from top to bottom.
An additional column headed (something like) "Tax clarity"* and labelled 1 - 100.
The page heading should read, "Which countries' tax system encourages businesses?"*
The presentation should include no additional information, just the required references. No preamble etc.
That should help make the point somewhat clearer.

* Both could certainly be improved by your other readers

Posted by: Robert | Jul 11, 2013 12:56:34 AM

I'm a little dubious of an analysis that rates Cyprus (71!) among the best tax climates, higher than Singapore (68) and HK (51). Nor am I convinced that Belgium (62) is such a great tax haven as to put it within spitting distance of Jersey and Luxembourg (both at 72). All the Belgians I grew up with used Luxembourg as their version of the Cayman Islands!

And for all that the US (24) is bad, can it really be worse than Algeria and Angola (both at 33), Bangladesh (36), or Belarus (37)? I mean, really ?!?

I suspect that this analysis fails to take into account factors such as the strength of the country's institutions: to go back to Cyprus, the government there in effect just passed a massive tax on bank depositors. Any country where that sort of thing goes on should go straight to the bottom of the list.

Posted by: David | Jul 10, 2013 8:30:45 PM

2005-2009. Interesting.

Posted by: Neil | Jul 10, 2013 8:11:54 PM