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Argument For Reduction In High US Capital Gains Taxes

by Mike Godfrey,, Washington

17 February 2014

A study from the Tax Foundation (TF) has looked at the comparatively high state and federal capital gains tax (CGT) rates in the United States, and has suggested that lowering those rates would increase investment and, consequently, lead to more economic growth.

The TF notes that increased saving "leads to higher levels of investment, a larger capital stock, increased worker productivity and wages, and faster economic growth. However, the US currently places a heavy tax bias against saving and investment. One way it does this is through a high top marginal tax rate on capital gains."

The top US marginal federal tax rate on long-term capital gains income is put at 23.8 percent, while states also levy CGT that ranges from zero percent in states with no individual income tax, such as Florida, Texas, South Dakota, and Wyoming, to 13.3 percent in California.

As a result, the TF calculates that the average combined top marginal rate in the US is 28.7 percent; the sixth highest comparative rate and exceeding the average top CGT rate of 18.2 percent faced by taxpayers in all Organization for Economic Co-operation and Development (OECD) countries.

In addition, taxpayers in some US states face top rates on capital gains over 30 percent, which is higher than the actual rates payable in most OECD countries, and California's top marginal CGT rate of 33 percent would be the third highest.

The TF also points out that CGT represents "an additional tax on a dollar of income that has already been taxed multiple times," due to the previous incidence of individual and corporate income taxes, and that it "encourages present consumption over savings, (because) it makes more sense to spend now, rather than later and pay multiple taxes."

It is added that the "relatively high CGT also harms the competitiveness of US corporations by raising the cost of capital. As corporations seek higher returns, corporate investment will move to countries that have a lower CGT."

Tax reform proposals that included "increasing taxes on capital income would further the bias against savings, leading to lower levels of investment and slower economic growth," the TF concludes. "Lowering taxes on capital would the reverse effect, increasing investment and leading to greater economic growth."

TAGS: capital gains tax (CGT) | tax | economics | fiscal policy | tax rates | United States | tax reform | Tax

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