Small Saver Incentives Small Saver Incentives
An International Comparison of the Taxation of Interest, Dividends, and Capital Gains
Many countries tax the interest, dividends, and capital gains income received by individuals more lightly than does the United States, according to a recent survey of twenty-four industrialized and developing countries that the ACCF Center for Policy Research commissioned from Arthur Andersen LLP. High tax rates on dividends and capital gains increase the bias against saving and investment, raise the cost of capital for new investment, and slow U.S. economic growth. The Center study also shows that many countries provide tax incentives for small savers by exempting some portion of the income from tax.
Interest received by individuals is taxed at a higher rate in the United States than in many other countries; the marginal tax rate is 39.6 percent in the United States compared to an average of 32.4 in the countries surveyed as a whole (see Comparison Table I, and accompanying notes). Nearly 40 percent of the countries surveyed tax interest income at a lower rate than ordinary income; for example, Italy taxes ordinary income at a top rate of 46 percent while its top tax rate on interest income is only 27 percent.
In several countries surveyed, small savers receive special encouragement in the form of lower taxes or exemptions on a portion of the interest they received:
- Australia: The first $1,951 of interest is taxed at a rate of 33.5 percent (instead of the 48.5 percent rate on ordinary income).
- Belgium: The first $1,484 of interest on bank saving accounts is exempt from tax.
- Chile: The first $1,100 of interest income is exempt from tax.
- Germany: The first $6,786 of interest income for married couples filing a joint return ($3,393 for singles) is exempt from tax.
- Japan: Interest on saving up to $26,805 is exempt from tax for individuals older than 65.
- Netherlands: The first $987 of interest income for married couples ($494 for singles) is exempt from tax.
- Taiwan: The first $8,273 of interest received from local financial institutions is exempt from tax.
- United Kingdom: Interest income received by savers in the 23 percent income tax bracket is taxed at a rate of 20 percent.
Dividend income is also taxed more heavily in the United States than in the other countries surveyed; the U.S. tax rate is 60.4 percent (combined corporate and individual tax on dividend income) compared to an average of 51.1 percent in the surveyed countries as a whole (see Comparison Table I, and accompanying notes). Of the countries surveyed, 62.5 percent offset the double taxation of corporate income (the income is taxed at the corporate level and again when distributed in the form of dividends) by providing either a lower tax rate on dividend income received by a shareholder or by providing a corporation with a credit for taxes paid on dividends distributed to their shareholders.
In addition, small shareholders receive preferential treatment in about one-fourth of the countries surveyed:
- Australia: The first $1,951 of dividends is taxed at a rate of 33.5 percent (instead of the 48.5 percent rate on ordinary income).
- Chile: Taxpayers may exclude the first 50 percent of dividends received up to $33,000 annually; above this threshold, 20 percent of dividends received are excluded from tax.
- France: The first $2,661 of dividends on French shares received by a married couple is exempt from tax ($1,330 for singles).
- Japan: Dividends of less than $350 from each individual corporation are taxed at a top rate of 20 percent instead of 50 percent. In addition, shareholders with non-dividend income of less than $70,000 get a 10 percent tax credit on dividends received; those with non-dividend income greater than $70,000 get a tax credit on dividends ranging from 5 percent to 10 percent.
- Netherlands: The first $987 of dividend income for married couples ($494 for singles) is exempt from tax.
- Taiwan: The first $8,273 of dividends from local companies is exempt from tax.
Capital Gains Tax Rates
and 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 ordinary income rates as high as 39.6 percent in the United States compared to an average of 19.4 percent for the sample as a whole (see Comparison Table II,accompanying notes). Long-term gains face a tax rate of 20 percent in the United States versus an average of 15.9 for all the countries surveyed. 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.
Several countries provide incentives for small savers to invest in capital assets:
- Canada: Provides an exclusion for the sale of shares of Canadian-owned small businesses, subject to a lifetime limit.
- Chile: Provides an annual capital gains exclusion of $6,600.
- Denmark: Exempts capital gains from the sale of publicly listed shares valued at less than $16,000 if held three or more years.
- France: Exempts capital gains if gross proceeds are less than a threshold amount ($8,315 in 1998).
- United Kingdom: Excludes up to $11,225 per year of net gains.
The Center’s study demonstrates that many countries tax the interest, dividends, and capital gains received by individual taxpayers at lower rates than does the United States. A substantial number of countries also provide special tax incentives to encourage small savers. Perhaps not coincidentally, almost all the countries surveyed have higher saving rates than the United States. More favorable tax treatment for U.S. savers, especially small savers, could encourage individuals to provide more for their own retirement as well as help to provide the funds necessary for investment and economic growth.
|Table I: Interest Income, Dividend Income|
|COUNTRY||Gross domestic saving as a percent of GDP, 1996||INTEREST INCOME||DIVIDEND INCOME|
|Taxation of corporate distributions including dividend income|
|Interest income maximum rate||Other preferential rate for interest income of individuals?||Corporate/ individual integration?||Combined corporate and individual tax rate|
*Rate is lower than that on ordinary income
|79.2% answer “yes”||62.5% answer “yes”||51.1|
|Table II: Individual Capital Gains|
|Country||Maximum tax rates on equities||Individual holding period|
|Australia||48.5||48.5; asset cost is indexed||No|
|Chile||45.0; annual exclusion of $6,600||45.0; annual exclusion of $6,600||No|
|China||20.0; shares traded on major exchange exempt||20.0; shares traded on major exchange exempt||No|
|Denmark||40.0||40.0; shares valued at less than $16,000 exempt if held 3+ years||Yes, 3 years|
|France||26.0; annual exclusion of $8,315||26.0; annual exclusion of $8,315||No|
|Germany||55.9||Exempt||Yes, 6 months|
|India||30.0||20.0||Yes, 1 year|
|Japan||1.25% of sales price or 20.0% of net gain||1.25% of sales price or 20.0% of net gain||No|
|Korea||20.0; shares traded on major exchange exempt||20.0; shares traded on major exchange exempt||No|
|Taiwan||Exempt (local company shares)||Exempt (local company shares)||No|
|United Kingdom||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||39.6||20.0||Yes, 1 year|
|Average||19.4||15.9||79.2% have no holding period|