U.S. Individual Income Tax Rate Ranks Poorly Internationally

By at 19 May, 2017, 10:20 am

by Raymond J. Keating-

As the tax reform debate proceeds, it’s important to understand that entrepreneurs and businesses are not only concerned about the corporate income tax rate, but also the individual income tax rate. After all, roughly 95 percent of U.S. businesses as non-C-Corps pay the personal rather than the corporate income tax. For good measure, individual income tax rates affect incentives for working and for investing “sweat equity” in a business.

Unfortunately, the U.S. imposes onerous personal income taxes, with the top U.S. rate in 2017 ranking dismally among the 144 nations listed in KPMG’s database (with a correction made for France).

Consider some key points:

• As for top personal income tax rates, the U.S. 39.6 percent tax rate ranks 106th among 144 nations this year.

• The U.S. 39.6 percent individual income tax rate exceeds the average rates for the globe (33.73 percent) the Americas (34.29 percent), Asia (30.50 percent), and Europe (35.51 percent).

However, the news gets worse when factoring in the average state income tax rate (excluding local income tax rates but accounting for the deductibility of state income taxes on federal returns).

This adds at least three percentage points to the U.S. rate, taking it up to at least 42.6 percent. That, in turns, pushes the U.S. tax rate global ranking down further to 115th out of 144 nations.

Again, considering these numbers, the extremely poor ranking in terms of its corporate tax rate (second highest on the globe, as noted in this SBE Council analysis), and given the U.S. tax increases of the early 1990s, in 2013, and under ObamaCare, the need to provide substantial, broad, pro-growth tax relief and reform relief is clear.

Progress Under Tax Reform Proposals

If the top individual federal rate were reduced to 33 percent, as proposed by the Trump administration, the U.S. would then be ranked 85th. Add in the average state rate (with deductibility), and the rate registers 36.36 and the ranking falls to 103rd. If federal deductibility of state income tax is lost in tax reform, then the combined rate would register 38.1 percent, and the ranking would fall further to 107th.

If the U.S. got back to the top rate prevailing at the end of the Reagan administration (28 percent), then we would rank 66th, and 77th with the average state rate of 31.1 percent (with deductibility) included. Without a deduction for state income taxes, the combined rate would register 33.1 percent, ranking 85th in the world.

It also must be noted that under the Trump administration plan, for example, the proposed corporate tax rate of 15 percent would pertain to non-C-Corps as well, but obviously not to salaries and wages.

When you think about how the Reagan supply-side revolution in the United States sparked a global movement toward lower tax rates, it’s distressing for the U.S. to now impose among the most burdensome tax rates on the planet. Much of the rest of the world has left us behind.

Tax reform needs to be bold, including across-the-board tax rate cuts, and that very much must include cutting the top individual rate. Getting back to the Reagan rate of 28 percent should be a minimal goal, preferably getting the rate down to 25 percent. That’s what SBE Council has proposed in the past, including our November 2016 report laying a pro-entrepreneur, pro-growth policy agenda.

Congressional leaders and President Trump cannot let another year go by without enacting meaningful tax reform. Our small businesses, entrepreneurs, America’s workforce and whole economy are dependent upon the move to a more competitive and pro-growth tax system


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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