A Competitive Corporate Tax Code is Key to Sustaining Strong Economic Growth

As the Persian Gulf conflict pushes energy prices higher, concerns are rising that global economic growth will slow or stall, requiring policymakers to maintain current economic momentum without worsening public indebtedness. Indeed, many advanced economies already face daunting levels of debt and will need robust growth, fueled by higher innovation and productivity, to offset the strains of aging populations, generous old-age benefits, and increased defense spending amid increased geopolitical hostilities. As such, there is a premium on fine-tuning taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. systems to generate revenues efficiently with minimal economic damage. Recent research points to corporate tax reform as most promising in this regard.

In the Organization for Economic Co-operation and Development (OECD)’s latest June projection, global GDP growth will slow significantly this year and next, due mainly to higher energy prices and disruptions from the Gulf conflict offsetting strong growth in investment and trade related to artificial intelligence (AI). Depending on the duration of the conflict, global GDP growth is projected to range from 2.1 percent to 2.8 percent this year and 1.8 percent to 3.1 percent next year, compared to 3.4 percent in 2025. In the worst-case scenario, several economies are expected to go into recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years., which would cause governments to go deeper into debt due to lost revenue and higher spending.

The US is projected to grow faster than the average for OECD countries throughout the projection period. In the optimistic scenario that the Gulf conflict is quickly resolved, the US is projected to grow 2 percent this year and 1.8 percent next year, compared to 0.8 percent and 1.2 percent in the Euro area and 0.6 percent and 0.8 percent in Japan.

Considering the uncertain macroeconomic outlook and recognizing the unprecedented fiscal challenges ahead for many countries, the OECD recommends policymakers aim to strengthen both economic growth and fiscal sustainability. On growth, the OECD suggests ensuring “that market incentives are in place that encourage firms and households to channel resources to their most productive uses.” Several of the country-specific recommendations relate to tax and trade policy: including improving tax system efficiency by broadening the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and reducing tax expenditures, reducing the labor tax wedgeBroadly speaking, a tax wedge is the difference between the pre-tax price or return and after-tax price or return. For labor income, it is the difference between the total labor costs to the employer and the corresponding net take-home pay of the employee., reforming research and development tax credits, reducing tariffs and non-tariffs barriers, and promoting rules-based open markets and openness to foreign direct investment.

While these are certainly sensible, high-level recommendations, a recent study by Tax Foundation Europe economists provides policymakers complementary, actionable advice on where to focus tax reforms to achieve stronger economic growth.

The study uses Tax Foundation’s International Tax Competitiveness Index (ITCI), an annual ranking that measures the efficiency of tax systems and their support of long-term capital formation and economic growth. The study finds more competitive tax systems (as measured by the ITCI) are associated with faster economic growth. The corporate tax component of the ITCI drives the study’s results, indicating that while the corporate tax generates a relatively small share of government revenues (as compared to individual income taxes, payroll taxes, or consumption taxes), on economic growth it has an outsized effect.

According to the study, an improvement by one standard deviation in the corporate category score (14.3 points) translates into roughly 1 percentage point higher annual GDP per capita growth and a cumulative 2.29 percentage points over three years. To put that into context, as of 2025 France ranks last with the lowest corporate score at 28.5 points while Latvia has the highest score of 100 points. The US ranks 9th with a corporate score of 71 points, while Germany ranks 30th with a corporate score of 54.3 points (16.7 points behind the US) and Japan ranks 35th with a corporate score of 48 points (23 points behind the US).

While many studies have found that reducing corporate tax rates tends to boost investment and economic growth, this study goes beyond that. It also accounts for the structure and the base of the corporate tax in each country, scoring tax systems higher based on their simplicity, neutrality, and broad-based support for investment. The ITCI breaks the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. category into three subcategories: the top marginal corporate income tax rate, cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. (including depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco, loss offset rules, and treatment of inventory), and incentives and complexity (with patent boxes, research and development credits, digital service taxes, and surtaxes and other separate rates reducing the score).

The US ranks third in cost recovery, improved by expensing provisions in last year’s One Big Beautiful Bill Act (OBBBA), but 24th on the corporate tax rate and 12th on incentives and complexity. The US corporate tax rate is now middle-of-the-pack after 2017’s Tax Cuts and Jobs Act (TCJA) reduced it from the highest in the OECD.

The business tax reforms built into the TCJA and OBBBA contributed to the US overall ITCI ranking improving from 29th in 2014 to 14th in 2025. Other countries that have seen large improvements in their ITCI ranking include Canada, Greece, Hungary, and Iceland. The United Kingdom and Canada have followed the US in providing expensing for machinery and equipment. Meanwhile, several countries have slipped in the rankings, including Colombia, Poland, Belgium, Chile, and Czech Republic. Many of these moves were driven by changes to business taxes.

The 12-year history of Tax Foundation’s ITCI shows that tax policy is constantly in flux around the world and that tax policy design choices matter for economic growth. While policymakers will need to grapple with several challenges this year and in the years to come through various policy adjustments, the evidence is increasingly clear that the important overarching goal of achieving robust, long-term economic growth very much depends on the competitiveness of the corporate tax system.