Estonia's tax code maximizes revenue, minimizes distortions, and its marginal rates are low.
For the fifth year in a row, the tiny Baltic nation of Estonia has been named the most tax-competitive country in the world in the 36-member Organisation for Economic Co-operation and Development by the Tax Foundation, a conservative U.S. think tank. Estonia retained the top spot by instituting changes to its VAT and individual income tax, kicking the threshold for the former up by 8.5% and for the latter from $28,571 to $31,020.
The data supporting is presented in the 2018 International Tax Competitiveness Index, which seeks to measure the extent to which a country’s tax system adheres to two key principles: competitiveness and neutrality. A competitive tax code, according to the Tax Foundation, is one that keeps marginal tax rates low. A neutral tax code seeks to raise the most revenue with the fewest economic distortions.
“A tax code that is competitive and neutral promotes sustainable economic growth and investment while raising sufficient revenue for government priorities,” say the authors of the report. Rounding out the top ten for 2018 are (in descending order): Latvia (2nd), New Zealand, Luxembourg, the Netherlands, Switzerland, Sweden, Australia, the Czech Republic, and Austria.
“While Estonia’s tax system is the most competitive in the OECD, the other top countries’ tax systems receive high scores due to excellence in one or more of the major tax categories,” the authors say. “Latvia, which recently adopted the Estonian system for corporate taxation, also has a relatively efficient system for taxing labor.”