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Thursday, October 30, 2008

The U.S. Capital Gains Tax Rate: An International Perspective

A new report by Ernst & Young, commissioned by the American Council for Capital Formation, compares individual long-term capital gains taxes among 25 major economies of the world as well as major trading partners of the U.S:

The U.S. capital gains tax rate compares unfavorably with that of many other major economies (see Figure 1). More than half of the countries surveyed have individual capital gains tax rates lower than that of the U.S.


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This chart is misleading. A large fraction of capital gains dollars accrue to taxpayers in the AMT exemption phaseout range from about $150k to $400k gross income. In that range the federal capital gains tax effective rate is 22%. Add the state tax rate to that, 9.3% in California. We're already past Sweden before any increase in today's rates!

Posted by: AMTbuff | Oct 30, 2008 3:03:27 PM

Much of what we call "capital" gains would more properly be classed as gains on the appreciation of land or of things the classical economists would have classified as land -- natural resources, things like landing rights, water rights, broadcast spectrum, etc -- things which are not of individual production and of inelastic supply.

Taxing such things collects for the community value which the community creates. Smart societies do that. Dumb ones let that value accumulate in private portfolios.

Houses depreciate. Machines depreciate. Ash to ash. Land appreciates. We ought not to allow anyone to treat land and capital as if they were similar. They are as different from each other as each is from labor.

Posted by: LVTfan | Oct 30, 2008 3:37:54 PM

And most U.S. citizens/residents pay a higher rate on capital gains after considering state income tax.

Posted by: Jeff | Oct 30, 2008 8:07:00 PM

There is that Iraq War to finance. The British discovered that policing the world is expensive, so why should it be any different for the United States?

One thing the chart misses is that the U.S. tax code is rife with exclusions and loopholes. Some of the simple ones include tax exempt municipal bonds and bond funds, possible capital loss offset (at least $3000 per year), and tax exempt or tax deferred retirement accounts (such as Roth IRAs). If you only look at the "advertised rate" you miss some big differences.

A much better chart would show the *actual* capital gains tax payments across countries. That just requires taking the total taxes attributable to capital gains collected by the IRS and their peer agencies around the world, then divide by the total capital gains in each country. (This is the same problem with corporate tax rate charts. Most corporations don't actually pay anywhere near the advertised U.S. corporate tax rate, and an awful lot of them pay nothing.)

By the way, I think everybody is missing a bigger point. Capital gains (and interest income) should be indexed to inflation and taxed together with labor income at ordinary (progressive) income tax rates. The current inflation treatment is ridiculous, penalizing capital asset owners merely for holding assets. Don't we want to promote long-term investing?

Posted by: Tim | Oct 31, 2008 12:00:55 AM

This chart is deceptive and does not take into account how different country's tax systems work. The Netherlands, for example, is listed as not taxing capital gains. It nevertheless taxes all property and savings at a rate of 1.2% as a substitute for a capital gains tax. This done by calculating an implied yield of 4% and taxing that yield at a 30% rate.

It is just another example of how direct comparisons of tax rates across countries are relatively meaningless as a tool for analyzing tax policy.

Posted by: ECM | Oct 31, 2008 11:16:08 AM

Good point, ECM. What you're describing is a wealth tax (particularly the tax on savings), and some countries tax that way. However, I don't think the Netherlands is one of them now.

Posted by: Tim | Oct 31, 2008 9:05:13 PM

Having most of my investments in the US and Australia, I think I am getting the worst of the CGT impacts! Great Graphic though. Would be interesting to see how returns for these countries compare..

Posted by: andy | Dec 29, 2008 9:51:36 AM