U.S. Now Has Some of the World’s Highest Capital Gains Tax Rates
Capital gains tax rates in the United States, which were raised in January, are now among the highest in the world, causing a drain on the economy and putting the U.S. economy at a competitive disadvantage, according to a new analysis by the Tax Foundation.
“As Congress begins debating tax reform, members need to take a serious look at the U.S. capital gains tax rate,” said Tax Foundation economist Kyle Pomerleau.
At the beginning of this year, the top marginal rate on capital gains was raised from 15 percent to 23.8 percent. Although that’s lower than the tax on ordinary income, states also tax capital gains, some of them as high as 13.3 percent, adding an additional burden on savers and investors. Some taxpayers could pay up to a 33 percent tax on capital gains, far exceeding the average rate in other developed nations.
Disincentive to Invest
Although there is not much lawmakers in Washington, DC can do about state tax policy, they can be mindful of the combined effects of state and federal policies. With a combined state and federal average rate of 27.9 percent, investment in the United States is at a severe competitive disadvantage. Investors could easily start looking for higher rates of return in other countries with much lower tax rates or simply choose to reduce domestic investment and instead consume more.
“This high tax rate has long-term negative implications for the economy as people save and invest less and capital seeks higher returns in other countries,” said Pomerleau. “Lawmakers should consider the negative economic impacts of such a high tax on investment and look to lower it in any tax reform package.”
The United States risks losing its competitive edge as other countries continue to reform their tax systems to attract businesses and promote economic growth. A high tax burden on capital gains harms growth and prosperity, he said.
Far Higher Than OECD Average
In his report, Pomerleau writes, “Among a number of major changes to the tax code in 2013, America’s top marginal statutory tax rate for capital gains increased from 15 percent to 20 percent, plus a 3.8 percent surtax for the Affordable Care Act. This increased the U.S. average rate (average of state capital gains tax rates + federal rate) to 27.9 percent from 19.1 percent, a rate that far exceeds the Organization for Economic Cooperation and Development (OECD) average of 16.4 percent.”
He notes that compared to the 33 individual countries in the OECD, seven of ten of the top capital gains rates are in U.S. states. “California, with a top rate of 33 percent, is the second-highest capital gains tax rate in the world, a rate higher than France, Finland, and Sweden,” Pomerleau writes.
Richard Morrison (Morrison@taxfoundation.org) is manager of communications at the Tax Foundation.
“The High Burden of State and Federal Capital Gains Taxes,” Kyle Pomerleau, Tax Foundation: http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-taxes