But if you don’t trust the numbers from a big accounting firm, then you can peruse a study from the pro-tax Organization for Economic Cooperation and Development that reaches the same conclusion.Posted on 11/03/2014 4:32:11 PM PST by Kaslin
According to the bean counters at Ernst and Young, the United States has one of the highest capital gains tax rates in the world.
But if you don’t trust the numbers from a big accounting firm, then you can peruse a study from the pro-tax Organization for Economic Cooperation and Development that reaches the same conclusion.
But does this really matter? Is the United States harmed by having a high tax rate?
The Wall Street Journal certainly makes a compelling case that high tax rates on capital gains are self-destructive.
And this remarkable chart shows that workers are victimized when there is less investment.
Let’s add to all this evidence.
Jason Clemens, Charles Lammam, and Matthew Lo have produced a thorough study for the Fraser Institute about the economic impact of capital gains taxation.
A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its original purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price. …Capital gains taxes, of course, raise revenues for government but they do so with considerable economic costs. Capital gains taxes impose costs on the economy because they reduce returns on investment and thereby distort decision making by individuals and businesses. This can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship.
It turns out that there are many reasons why the capital gains tax harms economic performance. Clemens, Lammam, and Lo explain the “lock-in effect.”
Capital gains are taxed on a realization basis. This means that the tax is only imposed when an investor opts to withdraw his or her investment from the market and realize the capital gain. One of the most significant economic effects is the incentive this creates for owners of capital to retain their current investments even if more profitable and productive opportunities are available. Economists refer to this result as the “lock-in” effect. Capital that is locked into suboptimal investments and not reallocated to more profitable opportunities hinders economic output. …Peter Kugler and Carlos Lenz (2001)…examined the experience of regional governments (“cantons”) in Switzerland that eliminated their capital gains taxes. The authors’ statistical analysis showed that the elimination of capital gains taxes had a positive and economically significant effect on the long-term level of real income in seven of the eight cantons studied. Specifically, the increase in the long-term level of real income ranged between 1.1 percent and 3.0 percent, meaning that the size of the economy was 1 percent to 3 percent larger due to the elimination of capital gains taxes.
Then the authors analyze the impact of capital gains taxes on the “user cost” of capital investment.
Capital gains taxes make capital investments more expensive and therefore less investment occurs. …Several studies have investigated the link between the supply and cost of venture capital financing and capital gains taxation, and found theoretical and empirical evidence suggesting a direct causality between a lower tax rate and a greater supply of venture capital. …Kevin Milligan, Jack Mintz, and Thomas Wilson (1999) sought to estimate the sensitivity of investment to changes in the user cost of capital…and found that decreasing capital gains taxes by 4.0 percentage points leads to a 1.0 to 2.0 percent increase in investment.
Next, they investigate the impact on entrepreneurship.
Capital gains taxes reduce the return that entrepreneurs and investors receive from the sale of a business. This diminishes the reward for entrepreneurial risk-taking and reduces the number of entrepreneurs and the investors that support them. The result is lower levels of economic growth and job creation. …Analysing the stock of venture capital and tax rates on capital gains from 1972 to 1994, Gompers and Lerner found that a one percentage point increase in the rate of the capital gains tax was associated with a 3.8 percent reduction in venture capital funding.
Last but not least, the authors also discuss the impact of capital gains taxation on compliance costs, administrative costs, and tax avoidance. They also look at the marginal efficiency cost of capital gains taxation and report on some of the research in that area.
Dale Jorgensen and Kun-Young Yun (1991)…estimate the marginal efficiency costs of select US taxes and find that capital-based taxes (such as capital gains taxes) impose a marginal cost of $0.92 for one additional dollar of revenue compared to $0.26 for consumption taxes. …Baylor and Beausejour find that a $1 decrease in personal income taxes on capital (such as capital gains, dividends, and interest income) increases society’s well-being by $1.30; by comparison, a similar decrease in consumption taxes only produces a $0.10 benefit. …the Quebec government’s Ministry of Finance…found that a reduction in capital gains taxes yields more economic benefits than a reduction in other types of taxes such as sales taxes. Reducing the capital gains tax by $1 would yield a $1.21 increase in the GDP.
Here’s my video on the topic, which explains that the right capital gains tax rate is zero.
The bottom line is that the United States is shooting itself in the foot.
>Or, to be more accurate, politicians are hobbling America’s productive sector 
and undermining U.S. competitiveness with senseless class-warfare taxation.
And don’t forget that the United States compounds the damage with the world’s highest corporate tax rate, pervasive double taxation of dividends, and a punitive death tax.
So while some countries are doing the right thing and abolishing their capital gains taxes, the United States is languishing in the international contest for more investment.
The only “good news” is that a few other nations also impose foolish policies as well.
P.S. It’s worth noting that all good tax reforms, such as the flat tax, completely abolish the capital gains tax.
P.P.S. This is yet another example of first-rate research from the Fraser Institute. They’re the publishers of Economic Freedom of the World, as well as some excellent research on the harmful impact of excessive government spending.
GHEY!!!
“By Executive Order, this report does not exist.” - Obama
But you’re forgetting something: taxes are imposed by law, and the President doesn’t make law.
We should be blaming congress.
And here is the reason why - one of the most shocking displays of stupidity I have ever seen on TV: https://www.youtube.com/watch?v=prWtWEnLl9c
Very ghay.
Speaking of which, I heard “Khent S Thicke” is making a cameo tomorrow...he smells DJSeamus’s blood in the water and is going in for the kill.
Of course. Reader's who are surprised by this have obviously not been paying attention.
High capital gains tax is just one more way obola is fulfilling his promise of, "fundamentally changing America." Isn't this fun?
Don’t know the system in the US, but here in Canada, you are taxed 50% of the capital gain at the marginal rate. For example, suppose your marginal rate is 40% (both Provincial and Federal), and you had a capital gain of $100,000. You would pay $20K of tax on the gain ($100,000*50%*40%). Gains on the sale of your principle residence are exempt unless at some point during your ownership, it was NOT your principle residence. The reason being, interest is NOT tax deductible on the mortgage of your principle residence.
The need is for a judo trick to use the Democrats’ strength against them on this issue. I propose that the Congress enact an increase of 10% of the current rate. If the current rate is 40%, pass an increase to 44%.But, with a catch. The catch is that the revenue of the capital gains tax be capped at 10% above last year’s revenue, with any excess revenue above that value being rebated pro rata to the payers of the capital gains tax.
The effect of this revenue cap/rebate scheme would be that the the smart money, who have capital gains - and who know that the present cap gains tax rate is on the wrong side of the peak of the Laffer Curve - would recognize that the rebate would be large. It will be large because if it is large, the effective cap gains tax rate will not be higher but much lower.
IOW, the revenue cap scheme is a mechanism whereby the smart money takes the risk and proves that the current cap gains tax rate is on the excessive side of the Laffer Curve. A "tax increase" that is actually a radical cut.
Yay! We’re number one!
In the old days when the marginal income tax rate was up to over 90%, the tax rate on cap gains was “only” 25%. I think it’s now something like 40% - Obama got a big increase passed, without pretending that he would get more revenue from it, but just for “you didn’t build that" spite.
You really gotta wonder why some people are surprised when money goes where people can make more of it and keep more of what they make.
Marginal tax of 90%? WOW!
I believe that the highest in Canada, was in Quebec, at 60%. The highest in Alberta is now 39%, I believe. Don’t know, because the days of income like that for me never existed. Of course, we also have the GST, a consumption tax on most goods and it is a flat 5%. Other than Alberta, all other jurisdictions have an addition Provincial sales tax.
I believe that the highest in Canada, was in Quebec, at 60%. The highest in Alberta is now 39%, I believe. Don’t know, because the days of income like that for me never existed. Of course, we also have the GST, a consumption tax on most goods and it is a flat 5%. Other than Alberta, all other jurisdictions have an addition Provincial sales tax.
From Wikipedia:. . . and to that you must factor in State (and in some municipalities local) income tax, plus state sales tax and local property tax.
History of US Top Bracket income tax rates adjusted for inflationYear Rate . 2014 dollars Comment
1913 7% $11.86M First permanent income tax
1917 67% $36.68M World War I financing
1925 25% $1.34M Post war reductions
1932 63% $17.14M Depression era
1936 79% $84.45M -
1941 81% $79.86M World War II
1942 88% $2.75M Revenue Act of 1942
1944 94% $2.88M Individual Income Tax Act of 1944
1946 91% $2.41M -
1964 77% $3.03M Tax reduction during Vietnam war
1965 70% $1.49M -
1981 70% $548k Reagan era tax cuts
1982 50% $258k Reagan era tax cuts
1987 38.5% $186k Reagan era tax cuts
1988 28% $59k Reagan era tax cuts
1991 31% $142k Omnibus Budget Reconciliation Act of 1990
1993 39.6% $406k Omnibus Budget Reconciliation Act of 1993
2003 35% $398k Bush tax cuts
2011 35% $396k -
2013 39.6% $403k American Taxpayer Relief Act of 2012
You see, if you get capital gains, “you didn’t build that.”
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