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Comparing Cap Gains Tax Rates

When all variables are factored in, the U. S. has about the highest capital gains tax rate of any industrialized nation. We also have among the lowest savings rates and the lowest of capital formation rates as a percentage of gross domestic product. On long-term investments, the U. S. taxes capital gains at 28 percent, the highest among industrialized nations except for the U. K. and Australia. But those nations index their rates to inflation -- so their real rates are actually lower than ours. For short-term investments, the U. S. rate is 40 percent, on the higher end of the spectrum compared to other advanced countries. Belgium, Hong Kong and the Netherlands exempt capital gains from taxation. Looking at savings rates: Japan's savings rate averaged 17 percent between 1979 and 1994, with a capital gains tax rate of 1 percent of sale price or 20 percent of net gain, both long- and short-term. Belgium's savings rate averaged 18 percent, compared to a U. S. rate of 6.4 percent. On the other hand Italy and Sweden tax gains at the same 25 percent rate, but their net household savings rates average 20.7 percent and 2.7 percent, respectively, suggesting other factors affect savings. The U. S. tax code does not reward those who save and invest, and works to the detriment of capital formation. Many economists say the rate should be cut -- or, better still, the tax eliminated. Source: Adrienne Fox, "Why Cut Cap Gains Tax Rate? Our Level Is Higher Than Most," Investor's Business Daily, January 27, 1997.

Cap Gains: A Special Tax for Risk-Takers

Some economists see the capital gains tax as a special and specific tax on risk-taking. After being reduced in the late 1970s and early 1980s, the capital gains tax rate was increased by 40 percent -- from 20 percent to 28 percent. The result was fewer new businesses and less venture capital available, statistics show. New business incorporations rose at a 6.8 percent annual rate from 1968 to 1986 -- versus a meager 1.1 percent from 1987 to 1995. Real venture capital commitments rose at a 29.4 percent annual average rate from 1981 to 1986 -- compared to 6.5 percent from 1987 through 1995. If the average real rate of increase in venture funds during the early 1980s had been maintained, 1995 venture capital commitments might have topped $40 billion -- ten times the actual 1995 level. If new business incorporations had managed to continue at the average annual rate of increase from the previous two decades, almost 2.5 million more new businesses would have been incorporated from 1987 to 1995. To encourage new business formation and economic growth, some economists support cutting capital gains taxes by at least 50 percent and indexing the gains to account for inflation. Source: Raymond J. Keating (Small Business Survival Committee), "Please, Steal from the GOP, Mr. President," Washington Times, January 23, 1997.