Paying Taxes Methodology
What does Paying Taxes Measure?
Doing Business North America measures all taxes that are mandated at any level of government (including federal, state/province, and city). Indicators related to personal, corporate, and commercial property tax rates are collected to provide a full spectrum of taxes that businesses, employers, employees, and city residents can expect to pay.
Assumptions about the Individual and the Business
Due to the complexity of local tax systems, and to make the data comparable across economies, several assumptions about the business and the taxes and contributions are used.
The individual:
- Has annual income of two times the city’s income per capita.
The business:
- Is in its second year of operation.
- Does not qualify for investment incentives or any benefits apart from those related to the age or size of the company.
- Has taxable income of four times the city’s income per capita.
Assumptions about Taxes
- All the taxes and contributions recorded are those paid in the second year of operation.
Indicators
Total Corporate Income Tax Rate
The total corporate income tax rate is a group of indexes that measure taxes levied on a corporation’s income. It is comprised of three indicators: (i) the federal corporate income tax rate, (ii) the state (or province) corporate income tax rate, and (iii) the city corporate income tax rate. It is assumed that the corporation has annual taxable earnings equal to that of four times the local income per capita for determining the appropriate tax bracket in cases where a progressive tax system is used. The statutory tax rate that would apply to that income level is recorded (i.e., this is not meant to be an effective tax).
Total Personal Income Tax Rate
The total personal income tax rate is a group of indexes that measure taxes levied on an individual’s income. It is comprised of three indicators: (i) the federal personal income tax rate, (ii) the state (or province) personal income tax rate, and (iii) the city personal income tax rate. It is assumed that an individual has annual taxable earnings equal to that of two times the local income per capita for determining the appropriate tax bracket in cases where a progressive tax system is used. The statutory tax rate that would apply to that income level is recorded (i.e., this is not meant to be an effective tax).
Total Gross Receipts Tax
The total gross receipts tax variable is a group of two indexes that measure taxes levied on a corporation’s receipts. The first is an aggregate of the three indicators that measure statutory tax rates: (i) the federal gross receipts tax rate, (ii) the state (or province) gross receipts tax rate, and (iii) the city gross receipts tax rate. The second is a binary variable that measures the “base” of the tax with respect to whether substantial exemptions are allowed for business expenses (1) or not (0).
Commercial Property Effective Tax Rate
The commercial property effective tax rate measures annual taxes levied against commercial property. It is measured as a percentage of total commercial property value. Commercial property tax rates are calculated by using the local mill rate for a property and the local assessment ratio.
How the ‘Paying Taxes’ Category is Ranked and Scored
The ‘Paying Taxes’ category was ranked and scored using the following variables:
| Topic and Indicator | Highest Performer | Lowest Performer |
|---|---|---|
| Federal Corporate Income Tax Rate | 21.00% | 21.00% |
| State and Local Corporate Income Tax Rate | 0.00% | 37.50% |
| Federal Personal Income Tax Rate | 0.00% | 22.00% |
| State and Local Personal Income Marginal Tax Rate | 0.00% | 33.00% |
| Total Gross Receipts Tax Rate | 0.00% | 1.50% |
| Commercial Property Effective Tax Rate | 0.668% | 10.330% |
For each indicator, there is a top performer and a bottom performer. Economies with the best performance for a given indicator are awarded 10 “points,” or a score of 10. Cities at the level of bottom performance, or cities at or below two standard deviations from the mean, are awarded a score of 0. All the cities in between are scored based on their distance to the frontier. For each city, the number of awarded points across all indicators is aggregated, then divided by the number of indicators for which we had data. This is done because not all locations have complete data across all indicators, and doing so allows for all locations to be included in comparison.
For more information on how indicators, indexes, and groups are scored, how the ranking and scoring system for a category works, or how the overall Ease of Doing Business rank and score were derived, please read the first section of this methodology.
Sources
Data for this category was obtained from national, state, and local revenues/tax offices and tax practitioner and policy organizations.
To request more specific sources, contact: economicliberty@asu.edu