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 Income

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

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.

Conclusions

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
Argentina 18.0 33.0 Yes Yes 33.0
Australia 21.0 48.5 Yes Yes 48.5
Belgium 23.0 15.0* Yes No 74.1
Brazil 18.0 27.5 No Yes 33.0
Canada 21.0 31.3 No Yes 45.0
Chile 26.0 45.0 Yes Yes 45.0
China 44.0 20.0* Yes No 63.1
Denmark 21.0 58.0* No No 74.7
France 21.0 58.1 Yes Yes 66.8
Germany 23.0 55.9 Yes Yes 55.9
Hong Kong 31.0 Exempt* N/A Yes 16.0
India 24.0 30.0 Yes No 54.5
Indonesia 33.0 15.0* No No 51.0
Italy 22.0 27.0* Yes Yes 46.0
Japan 30.0 15.0 Yes Yes 64.0
Korea 34.0 40.0 Yes Yes 40.0
Mexico 23.0 1.7* Yes Yes 34.0
Netherlands 26.0 60.0 Yes No 74.0
Poland 18.0 20.0* Yes No 61.6
Singapore 50.0 28.0 Yes Yes 28.0
Sweden 22.0 30.0* Yes No 69.0
Taiwan N/A 40.0 Yes Yes 40.0
United Kingdom 15.0 40.0 Yes Yes 48.3
United States 16.0 39.6 Yes No 60.4
Average 25.2 32.4
*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
Short-term Long-term
Argentina Exempt Exempt No
Australia 48.5 48.5; asset cost is indexed No
Belgium Exempt Exempt No
Brazil 15.0 15.0 No
Canada 23.5 23.5 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
Hong Kong Exempt Exempt No
India 30.0 20.0 Yes, 1 year
Indonesia 0.1 0.1 No
Italy 12.5 12.5 No
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
Mexico Exempt Exempt No
Netherlands Exempt Exempt No
Poland Exempt Exempt No
Singapore Exempt Exempt No
Sweden 30.0 30.0 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

 

Notes on Table/Parts I & II
Interest Income
Argentina Interest from certain saving accounts and certificates of deposit receives preferential treatment.
Australia The first A$3,000 (US $1,951) of investment income from any source (including interest, dividends, and other business income of individuals) is subject to tax at 33.5 percent instead of 48.5 percent.
Belgium Exemption up to BF 55,000 (US $1,484) for interest on bank saving accounts (“spaarboekje”).
Chile Interest income up to US $1,100 annually is exempt from tax.
China Interest income earned on a deposit placed in China banks, or on a bond or debt issued by China, is exempt from tax.
France A withholding tax of approximately 30 percent may be requested.
Germany With respect to net interest income, single individuals can claim an allowance of DM 6,100 (US $3,393) per year, and married persons filing a joint income tax return can claim an allowance of DM 12,200 (US $6,786) per year.
India Interest income from certain specified securities (typically government securities) could be exempt.
Italy Interest income earned on bonds whose duration is longer than 18 months is taxed at 12.5 percent.
Japan Interest on saving up to ¥3.5 million (US $26,805) is exempt from tax for individuals older than 65.
Korea Various rate reductions are available for interest income.
Mexico Mexican-source interest is withheld at 1.7 percent of the principal.
Netherlands An exclusion of NLG 1,000 (US $494) (NLG 2,000 [US $987] if individual is married) is available for interest income. The exclusion will be reduced by tax-deductible interest paid on personal loans.
Poland The interest income of individuals earned on loans and bonds is not aggregated with other sources of income and is subject to a flat 20 percent income tax.

For individuals, interest income earned on State Treasury securities, local government bonds, and personal bank accounts is generally exempt.

Singapore Interest income received from savings with the POS Bank in Singapore, or foreign source interest income that is not remitted to Singapore, is exempt.
Sweden An individual may deduct certain interest expenses to offset interest income.
Taiwan Individual residents may exclude interest income from deposits in local financial institutions and dividends from local companies from taxable income up to NT$270,000 (US $8,273) per year.
U. Kingdom A U.K. individual whose marginal tax rate is 23 percent pays tax at a rate of 20 percent on savings income including interest.
United States Interest earned on qualified municipal bonds is tax exempt.
Dividend Income
Argentina Dividends are exempt from tax.
Australia The corporation keeps account of the amount of tax it has paid. At the time a dividend is paid, the corporation “franks” the dividend by notionally attaching to it the amount of Australian tax the corporation has paid on the profits from which the dividend is paid. Dividends are deemed to have been paid from the taxed profits first. The shareholder is assessed on both the cash dividend and the imputed tax (i.e., the dividend is “grossed up”). The imputed tax is then allowed as a credit against the shareholder’s tax. Any excess credit cannot be refunded.
Belgium Dividends are subject to reduced rates of tax, 25 percent for dividends on bearer shares and 15 percent for dividends on nominative shares.
Brazil Dividends are exempt from tax.
Canada Individual shareholder is taxable on 125 percent of the dividend received, and claims a credit equal to 13.33 percent of the total taxable dividend amount.
Chile The 15 percent tax paid at the company level may be credited against the tax on the shareholder’s taxable dividend (i.e., cash dividend plus the tax credit).

Under a special regime, individuals may exclude 50 percent of dividends received up to US $33,000 annually. Above this threshold, 20 percent of dividends received are excluded.

China Dividends from A shares listed in Shenzhen and Shanghai Stock Exchanges are currently exempt from tax.
France The shareholder credit equals 33.33 percent of the grossed-up dividend.

For dividends on French shares, a single individual may take a special deduction up to Fr 8,000 (US $1,330), and married persons may deduct up to Fr 16,000 (US $2,661).

Germany A corporate income tax credit on dividends is granted to shareholders in the amount of 43 percent of the net dividend. In addition, the corporation receives a refund of income tax, reducing the corporate rate from 45 percent to 30 percent.
Hong Kong Dividends from a corporation which is chargeable to tax are not included in the taxable income of any other person chargeable to tax.
India The corporation paying the dividend pays an additional tax equal to 10 percent of the dividend distributed to the shareholders. The shareholders are not subject to any additional tax on the dividend received.
Italy The credit is 58.73 percent of the dividends provided that the distributing company has paid an equal amount of taxes on the earnings distributed. The tax credit is offset against personal income tax computed on the dividend grossed up by the amount of the tax credit.

Dividends subject to a withholding tax as a definitive tax are excluded from the taxable income. Individuals are allowed to opt for the definitive withholding at 12.5 percent. In such cases no tax credit is granted and the total tax burden on corporate earnings is 49.5 percent.

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.
Korea The shareholder credit is 19 percent.
Mexico Dividends are exempt from tax.
Netherlands An individual may exclude NLG 1,000 (US $494) for dividends received from a Dutch resident company (NLG 2,000 [US $987] for married individuals).
Poland Dividends distributed to individuals are subject to a definitive 20 percent withholding tax.
Singapore The dividend is subject to normal individual income tax with a credit equal to the 26 percent corporate tax paid with respect to the earnings distributed.

Dividend income from shares held outside Singapore and not remitted to Singapore is exempt from tax.

Taiwan The shareholder credit equals the amount of the dividend (net of corporate tax) multiplied by 33.33 percent.

An individual may exclude interest received from a financial institution and dividends from local companies up to NT$270,000 (US $8,273) per year.

U. Kingdom At present, 25 percent of the cash dividend is available as a credit. From April 1999, 11.1 will be available. The taxable amount of the dividend is the cash dividend plus the credit.

After March 1999, the combined rate on corporate earnings will be 47.5 percent.

Capital Gains Income
Canada Exclusion applies only to sale of shares of Canadian-owned small businesses, subject to a lifetime limit.
Chile Original cost is adjusted by internal inflation. Annual limit for capital gains exclusion is approximately US $6,600.
Denmark Gains on publicly listed shares held three or more years are tax exempt if taxpayer owns less than US $16,000 of the company’s shares.
France Capital gains realized by individuals are not taxed if gross proceeds are less than a threshold amount (for 1998, Fr 50,000 [US $8,315]).
U. Kingdom Sliding scale of rates applies to one to ten years of ownership through an exclusion that rises gradually to 75 percent for assets held ten or more years. Thus, assets held ten or more years face a top marginal rate of 10 percent.

An individual may exclude up to £6,800 (US $11,225) per year of net capital gains.

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.