International Capital Gains Tax Rate Comparison: Where Does The US Stand?

The Capital Gains Tax Rate in USA is unfavorable for economic growth when compared with other major economies in the world, as per a report published by the American Council for Capital Formation (ACCF), based in Washington,DC. More specifically the study was based on the long-term capital gains tax rates for individuals. More than half of the countries in the study have lower capital gains tax rates lower than that of the United States.

Chart – International Individual Long-Term(LT) Capital Gains Tax Rate Comparison

US Capital Gains Tax Rate

Update 4/24/11: The German rate is 25% and not 0% as shown in the chart above. There is also no difference between short-term and long-term capital gains according to a reader.

The above chart shows that the LT capital tax rate is 0% in many developing countries such as India, Indonesia, Thailand and Malaysia. This is understandable since many of these emerging countries want to encourage capital investment by individuals for growth.Besides these Asian countries have historically been a country of high savers relative to the developed world.This is another reason why the LT individual capital gains tax is kept at 0%.

However what is fascinating is that some developed countries such as Belgium, Germany,  Singapore, The Netherlands, Hong Kong and Taiwan also have 0% tax rates. One would think that the socialist European countries of Germany, The Netherlands and Belgium would have high capital tax rates even for individuals.It is unclear if countries such as Singapore, Hong Kong and Taiwan have 0% tax rates since they are export-driven economies and also they are all Asian countries where historically consumers saved more than invest in capital gain producing assets.

Japan, Canada and Italy are marginally better in terms of LT individual tax rates. The US rate at 15% is higher than the emerging markets mentioned above and also slightly above Canada which is again a highly socialist country. The US rate is equivalent to the Brazil tax rate. Brazil has a different approach to the capital tax structure than other emerging countries. The UK, with one of the high tax rate system in the world, has a LT individual capital gains tax of just 18% which is 3% higher than the US rate.

According to the ACCF report, the last time major reduction was made in this tax was in 1978 initiated by the late Congressman Bill Steige. Many folks today believe that” the ’78 cut in capital gains tax rates not only helped make Silicon Valley the center of technological breakthroughs but has also had a strong, positive, and lasting impact on overall investment, economic growth and job creation in the U.S.” The cuts in capital tax rates in 2003 under President George Bush also helped the US economy maintain strong growth up until the credit crunch began early 2008.

President Obama’s has proposed some positive changes to the current capital gains tax structure. His Comprehensive Tax Plan states:

Eliminating Capital Gains Taxes for Entrepreneurs and Investors in Small Business. Barack Obama understands that small businesses are the engines of our economy, and he will eliminate all capital gains taxes on investments in small and start up firms.

Capital Gains: Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today. For those in the top two income tax brackets – likewise adjusted to affect only families over $250,000 – Obama will create a new top capital gains rate of 20 percent. Obama’s 20% rate is equal is the lowest rate that existed in the 1990s and the rate that President Bush proposed in 2001. It is almost a third lower than the rate that President Reagan signed into law in 1986.

Dividends: The top dividends rate for people making over $250,000 would be set at 20 percent.Dividends will not return to being taxed at ordinary income tax rates. Obama’s 20 percent rate on dividends will be 39 percent lower than the rate President Bush proposed in 2001, and would be lower than all but 5 of the last 92 years we have been taxing dividends. ” (emphasis added)

Source: http://www.barackobama.com

While the Obama Plan encourages entrepreneurship by eliminating the capital gains tax, raising the tax rate to 20% for high income earners over $250K may not be conducive for the economy. In fact, the ACCF calls for the continuation of the current 15% to maintain the competitive edge of our economy over other countries countries. In my view, since the current administration is doling out billions to failed financial institutions to keep them alive, it will be a low-cost, simple but effective strategy to not increase the current capital gain tax rates.

Countries such as Sweden and Denmark have very high tax rates at 30% and 45% since the Scandinavian countries are the most socialist countries in the world and follow a unique form of political system. The Scandinavian countries tax their citizens such high rates in order to provide liberal social benefits such as unemployment, medical, maternity leave, pension benefits etc. They also aim for full employment with the government being the employer of last resort.

To download the full ACCF report, click here.

Related Links:

Withholding Taxes for Foreign Stock Dividend Payments

Is the U.S. Corporate Tax System A Major Barrier to Economic Growth

Withholding Tax Rates by Country for Foreign Stock Dividends

Impact of Tax Rate Changes on Capital Gains Realizations

More on this topic (What's this?) Read more on Capital gains tax at Wikinvest

9 Comments

  1. I would just like to mention that in Canada we have very large individual deductions (22kish) for long term savings on top of the lower tax rate. Also, there are other tax structures for larger amounts of money (i.e. pensions) making the majority of savings tax free.

  2. THe German rate is wrong.
    It is now 25%, we changed it (for a reason)
    But now there is no difference between short term CG and long term CG any more.

  3. Maximilian
    Thanks for the comment. I added an update to my post above.

    honeyoak
    Thanks for comment.I did not know about those in Canada. It would be nice if they had similar structure here in the U.S.

  4. Japan had a 90% real estate capital gains tax rate during their bubble. (I think its 50%, now.) With this tax rate it didn’t pay to sell a property so owners borrowed against it. With very little supply real estate prices skyrocked giving bankers much confidence that their loans were secure. The reinvestments of these borrowings lifted all assets yet more, and on and on. Thus, the cause for the Japanese Bubble. But this lesson (high tax rates distort an economy) is lost in history. Such a shame.

  5. Capital gains is not exempt in Mexico. There is a tax on income from the sale of property and otherwise there is no such thing as capital gains because capital gains is treated like any other income for taxation purposes. No distinction is made.

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