The U.S. Tax System Gets a Middling Score

Fortunately, we do better on overall economic freedom, despite losing ground.

Politicians may not like it, but the countries they misgovern compete with one another for businesses, people, and capital. To attract startups, entrepreneurs, and investors, governments have to offer attractive environments, or else lose out to friendlier nations. When it comes to tax competitiveness, a new report says that Estonia leads the way in first position, with the United States lagging at 17th.

---

Low Rates and Simplicity Make Countries More Attractive

"The structure of a country's tax code is a determining factor of its economic performance," write Alex Mengden and Luis Zarka for the Tax Foundation's International Tax Competitiveness Index 2026. "A well-structured tax code is easy for taxpayers to comply with and can promote economic development while raising sufficient revenue for a government's priorities. In contrast, poorly structured tax systems can be costly, distort economic decision-making, and harm domestic economies."

The report notes that competition among countries has resulted in widespread improvements (and some backsliding) across the world in recent years. Especially among members of the Organization for Economic Cooperation and Development (OECD), marginal tax rates on corporate and individual income have declined. That said, most governments haven't given up on milking their populations, with growing reliance on payroll taxes and value-added taxes (VAT).

On the other hand, while "corporate tax base improvements have occurred in Canada, Germany, Lithuania, the United Kingdom, and the United States," France, the Slovak Republic, and Slovenia have hiked corporate tax rates. Even worse, tax policy has moved in many countries from a revenue-raising measure into a weapon of economic warfare "deployed to exert economic pressure."

The Tax Foundation's index ranks countries on the degree to which they keep their tax systems competitive—with low rates—and neutral, with minimal social engineering to avoid economic distortions.

---

Estonia Is First, France Last, With the U.S. in the Middle

According to these criteria, Estonia scores in first place for the best tax code in the OECD for the 13th straight year. According to Mengden and Zarka, the tiny Baltic state earns this distinction for four reasons:

First, it has a 22 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 22 percent tax on individual income that does not apply to personal dividend income. Third, its property tax applies only to the value of land, rather than to the value of real property or capital. Finally, it has a territorial tax system that exempts 100 percent of foreign profits earned by domestic corporations from domestic taxation, with few restrictions.

By contrast, France comes in dead last with the highest top corporate tax rate (36.1 percent) in the OECD, on top of which are "multiple surtaxes and distortive production taxes." France "also applies multiple distortionary property taxes with separate levies on estates, bank assets, and financial transactions, in addition to a wealth tax on real estate. Its VAT covers about 50 percent of final consumption, and it has one of the highest VAT registration thresholds."

The United States ranks at 17, down one place from last year. Among the U.S.'s weaknesses is that its "real property tax burden is among the highest in the OECD" and "the US has a partial territorial system and does not exempt foreign capital gains income." On the plus side, Americans pay relatively low sales/consumption taxes (an average of 7.5 percent, while the OECD average is 19.4 percent).

Not discussed in depth in the index, but still important, is that the U.S. is one of two countries (along with Eritrea) that base income taxation on citizenship rather than residency. "A Canadian living in France pays French taxes, not Canadian ones. An American in France? They pay French taxes and still file with the IRS," notes Bright!Tax. The U.S. tax obligation can be offset for nonresidents, but only by jumping through more bureaucratic hoops.

By and large, countries score better on the index by keeping tax rates low and broadly applied, emphasizing simplicity, and keeping their systems neutral to raise revenue and encourage investment, rather than achieve social and political goals.

Not everybody shares the Tax Foundation's preference for low burdens and minimal complexity. In its 2022 report on Lithuania's tax system (ranked a commendable 5th by the International Tax Competitiveness Index 2026), the OECD urged the country to increase taxes on businesses and self-employed people, and to increase reporting requirements. The OECD apparently favors higher tax burdens and complexity. Keeping the OECD happy would undoubtedly make Lithuania (or any country) less attractive to investors and entrepreneurs.

---

The U.S. Scores Better on Overall Economic Freedom—Though It's Losing Ground

While the index's middling score for the U.S. on tax competitiveness is disappointing, if understandable, it's not the final word on a country's economic attractiveness. In the Fraser Institute's recently published Economic Freedom of the World 2026 report, the U.S. ranks a credible 5th place, based on 2024 data. It comes in after Hong Kong, Switzerland, Singapore, and New Zealand. The formerly British and now Chinese territory of Hong Kong remained in the leading position despite erosion in economic liberty to accompany its sadly decaying civil liberties status. That's a worldwide concern.

"Global economic freedom fell following the pandemic as policymakers imposed new regulations, raised barriers to trade, expanded the size of government, and then printed money to pay for spending," wrote the Fraser Institute authors, including the late James Gwartney. "While governments have begun to reverse these policies, economic freedom in the average country has not yet returned to pre-pandemic levels."

Unfortunately, the U.S. is forecast to slide two positions in next year's Economic Freedom report because of "increases in the size of government, weaker protection of property rights and the rule of law, and significant restrictions on trade freedom."

Improving the U.S. tax environment might help to improve America's economic freedom score. Then again, so would reducing government's role and discontinuing protectionist policies.

Tax competitiveness is one important element of any country's overall economic freedom, which creates an attractive environment to invest, create businesses, and generate prosperity. The U.S. has long thrived because it is, in relative terms, free. That's a status worth maintaining.