U.S. Tax Competitiveness Has Room for Improvement

Additional content provided by John Lohse, CFA, Research.

In today’s globalized economy, the structure of a country’s tax system plays a crucial role in determining its economic performance. International tax competitiveness, which refers to how favorable a country’s tax policies are compared to others, can significantly impact both business and investment decisions. In times of economic slowdown, the policy response — which often includes monetary easing — should include business-friendly tax policies. Here’s why investors should carefully monitor for any progress on the tax front that lifts the U.S. from its 18^th rank in tax competitiveness — currently behind other developed countries like Germany and Canada.

Attracting Foreign Investment

One of the primary ways international tax competitiveness boosts economic growth is by attracting foreign direct investment (FDI). Canada and Germany were primary drivers of the growth in FDI in recent years, but in aggregate, The Netherlands, Japan, Canada, and Britain accounted for half of the total foreign investment inside the U.S. When countries offer lower corporate tax rates and other tax incentives, they become more attractive to multinational corporations looking to invest. The arrival of foreign capital can spur the establishment of new enterprises, the growth of existing ones, and overall economic development. For example, nations with attractive tax rates frequently experience elevated levels of FDI, which subsequently drives job creation, enhances productivity, and elevates growth.

Encouraging Domestic Investment

Competitive tax policies not only attract foreign investors but also encourage domestic businesses to reinvest their profits within the country. Reduced corporate income tax rates allow businesses to retain more capital for expansion, research and development, and other growth-focused initiatives. This reinvestment can stimulate economic activity, boost employment rates, and ultimately result in higher economic growth.

Enhancing Economic Efficiency

A well-structured tax system that is competitive on an international scale can enhance economic efficiency by reducing distortions in economic decision-making. Excessively high tax rates can deter investment and savings, causing resources to be misallocated. On the other hand, competitive tax rates can motivate businesses and individuals to make economically sound decisions, such as investing in productive ventures instead of seeking tax shelters. This efficiency can result in greater overall economic output and growth.

Promoting Innovation and Entrepreneurship

Countries with competitive tax systems often foster a more favorable environment for innovation and entrepreneurship. Reduced taxes on profits and capital gains can motivate entrepreneurs to launch new ventures and invest in innovative initiatives. This entrepreneurial activity can propel technological progress, enhance productivity, and open up new markets, all of which contribute to a rise in gross domestic product (GDP).

Case Studies and Examples

Several countries have demonstrated the positive impact of international tax competitiveness on GDP. For instance, Ireland’s attractive corporate tax rate has drawn many multinational companies, resulting in substantial economic growth and a high GDP per capita. Likewise, Estonia’s tax system, which includes a flat tax rate and exempts reinvested profits from corporate income tax, has been recognized for creating a vibrant business climate and strong economic growth. The “2024 International Tax Competitiveness Index Rankings” chart highlights the ranking of the top 20 countries within the Organization for Economic Co-operation and Development (OECD) with the most favorable tax rates. On that list, the U.S. ranks 18^th, a spot that could certainly be improved upon to spur economic activity.

2024 International Tax Competitiveness Index Rankings

Source: LPL Research, Tax Foundation 03/19/25

Conclusion

International tax competitiveness is a key factor in boosting GDP. By attracting foreign and domestic investment, enhancing economic efficiency, promoting innovation and entrepreneurship, and reducing tax evasion, competitive tax policies can drive economic growth and improve a country’s overall economic performance. As countries continue to navigate the complexities of the global economy, maintaining a competitive tax system in the U.S. will be essential for fostering sustainable economic growth and prosperity. Investors should monitor Capitol Hill negotiations later this year as the Republican led Congress seeks to preserve key provisions in the Tax Cuts and Jobs Act (TCJA), which is set to expire at the end of this year. These negotiations, if successful, could send a strong business- and consumer-friendly signal that the U.S. is serious about remaining competitive on the global landscape.