The U.S. places a heavy tax burden on saving and investment with its capital gains tax, which harms the competitiveness of U.S. corporations by raising the cost of capital. This nonneutral tax essentially creates a bias against savings and slows economic growth, according to a February 11 report by the Tax Foundation, entitled the High Burden of State and Federal Capital Gains Tax Rates.
Currently, the United States’ top marginal tax rate on long-term capital gains income is 23.8 percent. In addition, taxpayers face state-level capital gains tax rates as low as zero and as high as 13.3 percent, according to the Tax Foundation. As a result, the average combined top marginal rate in the United States is 28.7 percent. This rate exceeds the average top capital gains tax rate of 18.2 percent paid by other taxpayers in the industrialized world.
The report emphasizes that capital gains taxes represent an additional tax on a dollar of income that has already been taxed multiple times and multiple layers of taxation encourage present consumption over savings. “As an individual, to avoid the multiple layers of taxation on the same dollar, it makes more sense to spend it all now rather than spend it later and pay multiple taxes,” states the report.
The Tax Foundation believes that the U. S. high tax burden on capital gains also has long-term negative implications for the economy. “As people prefer consumption today due to the tax bias against savings, there will be less available capital in the future. For investors, this represents less available capital for factories, machines, and other investment opportunities,” states the report. For corporations seeking higher returns, corporate investment will move to countries that have lower capital gains tax rates.
In addition, the report points out that capital gains taxes create a lock-in effect that reduces the mobility of capital. “People are less willing to realize capital gains from one investment in order to move to another when they face a tax on their returns,” states the report. “Funds will be slower to move to better investments, further slowing economic growth.”
The Tax Foundation concludes that the U.S. top marginal tax rate on capital gains, combined with state rates, “far exceeds rates faced throughout the industrialized world” and increasing taxes on capital income furthers the bias against savings, leading to lower levels of investment, and slower economic growth. Lowering taxes on capital gains, however, would reverse the effect, leading to increased investment and economic growth.
The full report can be found at: http://ift.tt/MeBVD3 .
By Jeff Carlson, CCH News Staff
Shared via my feedly reader