An International Comparison of Capital Gains Tax Rates

Most industrial and developing countries tax individual and corporate capital gains more lightly than does the United States, according to a survey of twenty-four industrialized and developing countries that the ACCF Center for Policy Research commissioned from Arthur Andersen LLP. The Center’s analysis shows that the United States taxes both short- and long-term capital gains more harshly than most other countries. High capital gains tax rates increase the bias against saving and investment, raise the cost of capital for new investment, and slow U.S. economic growth.

Individual Capital Gains Tax Rates

Both short- and long-term capital gains on equities are taxed at higher rates in the United States than in most of the other twenty-three countries surveyed. Short-term gains are taxed at 39.6 percent in the United States compared to an average of 19.4 for the sample as a whole (see comparison table, parts I & II, and accompanying notes [marked with asterisk]). Long-term gains face a tax rate of 20 percent in the United States versus an average of 15.9 for all the countries in the survey. Thus, U.S. individual taxpayers face tax rates on long-term gains that are 26 percent higher than those paid by the average investor in other countries. In addition, the United States is one of only five countries surveyed with a holding period requirement in order for the investment to qualify as a capital asset.

The reduction in individual capital gains tax rates in the Taxpayer Relief Act of 1997 lowered the cost of capital for new investment and thus will enhance U.S. productivity and economic growth. The 1997 reductions almost certainly contributed to the current budget surpluses. In addition, shortening the holding period for long-term capital gains from eighteen to twelve months, which was included in the IRS Restructuring and Reform Act of 1998, signed into law by President Clinton July 22, 1998, will be a further boost to investment.

Corporate Capital Gains Tax Rates

Similarly, short- and long-term corporate capital gains tax rates are higher in the United States than in most other industrial and developing countries surveyed. Both short- and long-term gains are taxed at a rate of 35 percent in the United States, compared to an average of 22.8 percent for short-term gains and 19.6 percent for long-term gains in the sample as a whole. In other words, U.S. corporations face long-term capital gains tax rates almost 80 percent higher than those of their competitors in other countries. The U.S. tax rate on long-term corporate capital gains is higher than that of all but two of the other countries surveyed (Germany [45 percent] and Australia [36 percent], and Australia provides for indexing the cost of an asset). In addition, only four of the twenty-four countries surveyed impose a holding period in order to be eligible for preferential corporate capital gains tax rates.

Conclusion

Sound tax policy and economic considerations, as well as revenue consequences, argue for further reductions in U.S. individual capital gains taxes. In addition, the U.S. corporate capital gains tax rate of 35 percent should be reduced, thereby creating a meaningful differential between the tax rate on ordinary corporate income and on capital gains. This would reinstate the historical U.S. treatment of corporate capital gains: an alternative corporate capital gains tax was part of the Internal Revenue Code from 1942 until its repeal by the Tax Reform Act of 1986.

 PART I: COMPARISON OF CAPITAL GAINS TAX RATES FOR INDIVIDUALS
Country Gross Domestic Saving as a Percent of GDP  Maximum Individual Tax Rate  Individual Capital Gains: Max. Tax Rate on Equities  Individual Holding Period
  Short-term   Long-term
Argentina 18.0 33.0 Exempt Exempt No
Australia 21.0 48.5 48.5 48.5; asset cost is indexed No
Belgium 23.0 56.7 Exempt Exempt No
Brazil 18.0 27.5 15.0 15.0 No
Canada 21.0 31.3 23.5 23.5 No
Chile 26.0 45.0 45.0; annual exclusion of $6,600 45.0; annual exclusion of $6,600 No
China 44.0 45.0 20.0; shares traded on major exchange exempt 20.0; shares traded on major exchange exempt No
Denmark 21.0 61.7 40.0 40.0; shares valued at less than $16,000 exempt if held 3+ years Yes, 3 years*
France 21.0 58.1 26.0; annual exclusion of $8,315 26.0; annual exclusion of $8,315 No
Germany 23.0 55.9 55.9 Exempt Yes, 6 months
Hong Kong 31.0 20.0* Exempt Exempt No
India 24.0 30.0 30.0 20.0 Yes, 1 year
Indonesia 33.0 30.0 0.1 0.1 No
Italy 22.0 46.0 12.5 12.5 No
Japan 30.0 50.0 1.25% of sales price or 20% of net gain 1.25% of sales price or 20% of net gain No
Korea 34.0 40.0 20.0; shares traded on major exchange exempt 20.0; shares traded on major exchange exempt No
Mexico 23.0 35.0 Exempt Exempt No
Netherlands 26.0 60.0 Exempt Exempt No
Poland 18.0 40.0 Exempt Exempt No
Singapore 50.0 28.0 Exempt Exempt No
Sweden 22.0 57.0 30.0 30.0 No
Taiwan N/A 40.0 Exempt (local company shares) Exempt (local company shares) No
United Kingdom 15.0 40.0 40.0; shares valued at less than $11,225 exempt 40.0; shares valued at less than $11,225 exempt Yes, 1 to 10 years*
United States 16.0 39.6 39.6 20.0 Yes, 1 year*
Average 25.2 42.4 19.4 15.9 79.2% have no holding period

 
 

 PART II: COMPARISON OF CAPITAL GAINS TAX RATES FOR CORPORATIONS
Country Maximum Corporate Income Tax Rate  Corporate Capital Gains: Maximum Tax Rate on Equities  Corporate Holding Period
  Short-term   Long-term
Argentina 33.0 33.0 33.0 No
Australia 36.0 36.0 36.0; asset cost is indexed No
Belgium 40.2 Exempt Exempt No
Brazil 33.0 33.0 33.0 No
Canada 29.1 21.8 21.8 No
Chile 15.0 15.0 15.0; asset cost is indexed No
China 33.0 33.0; shares traded on major exchange exempt 33.0; shares traded on major exchange exempt No
Denmark 34.0 34.0 Exempt* Yes, 3 years*
France 41.7 41.7 23.8 Yes, 2 years
Germany 45.0 45.0 45.0 No
Hong Kong 16.0* Exempt Exempt No
India 35.0 35.0 20.0* Yes, 1 year
Indonesia 30.0 0.1* 0.1* No
Italy 37.0 37.0 27.0* Yes, 3 years
Japan 34.5 34.5 34.5 No
Korea 28.0 20.0; shares traded on major exchange exempt 20.0; shares traded on major exchange exempt No
Mexico 34.0 34.0 34.0 No
Netherlands 35.0 Exempt Exempt No
Poland 36.0* Exempt Exempt No
Singapore 26.0 Exempt Exempt No
Sweden 28.0 28.0 28.0 No
Taiwan 25.0 Exempt (local company shares) Exempt (local company shares) No
United Kingdom 31.0* 31.0* 31.0*; asset cost is indexed No
United States 35.0 35.0 35.0 No
Average 32.1 22.8; United States is 54% higher than average 19.6; United States is 79% higher than average 83% have no holding period

 
 

*Notes on Table/Parts I and II
Maximum Individual Tax Rate
Hong Kong Maximum marginal tax rate is 20 percent for the assessment year 1997/1998 and 17 percent for 1998/1999.
Individual Capital Gains
Denmark Gains on shares held three or more years are tax exempt if taxpayer owns less than US $16,000 of the company’s shares.
U. Kingdom Sliding scale of rates applies to 1 to 10 years of ownership through an exclusion that rises gradually to 75 percent for assets held 10 or more years. Thus, assets held 10 or more years face a top marginal rate of 10 percent.
United States Shares held 12 months or more are taxed at a rate lower than that on ordinary income under the IRS Restructuring and Reform Act of 1998.
Maximum Corporate Income Tax Rates
Hong Kong Maximum corporate rate is 16 percent for the assessment year 1998/99 and 16.5 percent for 1997/98.
Poland The corporate rate will be reduced to 34 percent in 1999 and to 32 percent for 2000 and beyond.
U. Kingdom The corporate rate will be reduced to 30 percent effective from April 1999.
Corporate Capital Gains
Denmark For corporations, capital gains are tax exempt if the holding period is longer than three years.
India Capital gains from sale of equity investments and securities listed on stock exchange and held for more than one year are taxed at 20 percent.
Indonesia An additional tax of 0.5 percent applies to the disposition of founder shares (effective as of May 29, 1997). In this case, if the taxpayer does not want to use the facility of 0.5 percent, the normal progressive tax rate of 30 percent is applied.
Italy For corporations, a substitute tax of 27 percent applies on capital gains arising from the transfer of shares held and accounted for as financial assets for at least three years.
U. Kingdom The corporate rate will be reduced to 30 percent effective from April 1999.