ACCF Research: U.S. Capital Gains Tax Rate Uncompetitive With Many Other Major Economies

WASHINGTON, Oct 29, 2008 / The U.S. capital gains tax rate compares unfavorably with many major economies, trading partners and developing countries, according to a new report by Ernst & Young LLP, commissioned by the American Council for Capital Formation (ACCF). The report compares individual long-term capital gains taxes among 25 major economies of the world and more than half of the countries surveyed have individual capital gains tax rates lower than that of the U.S.

At a 15% long-term capital gains tax rate, the United States ranks higher than countries with lower, more competitive rates including Canada (14.5%), Italy (12.5%) and Japan (7%). Many countries have a capital gains tax rate of zero (0%) including Germany, Mexico, India, Malaysia, Taiwan and Honk Kong.

"A low capital gains tax rate has an important role to play in fostering economic growth and playing on a competitive global economic field," said ACCF Senior Vice President and Chief Economist Margo Thorning. "The U.S. falls far short when compared to many other countries and stands to be at even greater international disadvantage if capital gains tax rates are increased once the current 15% rate expires in 2010."

ACCF noted that since the historic reduction in capital gains taxes initiated in 1978 by the late Congressman Bill Steiger, lowering taxes on capital gains has been a crucial element in promoting the entrepreneurial drive on which the U.S. economy thrives. Entrepreneurs are a major force for technological breakthroughs, new start-up companies, and the creation of high paying jobs. Many today believe that the '78 cut in capital gains tax rates not only helped make Silicon Valley the center of technological breakthroughs but has also had a strong, positive, and lasting impact on overall investment, economic growth and job creation in the U.S.

The 2003 capital gains tax cuts have also been a boon to the U.S. economy. Extension of the 15% rate is crucial to maintaining the U.S. competitive edge against its major trading partners.

"As the next president and congress face the economic crisis, they must also be mindful of maintaining U.S. competitiveness when it comes to savings, investment and policies which stimulate innovation and entrepreneurship. Raising the capital gains tax rate is the wrong policy to pursue," Thorning concluded.

To view the ACCF report and an international comparison table of U.S. capital gains tax rates against other countries, click here.

Founded in 1973, The American Council for Capital Formation ( www.accf.org) is a nonprofit, nonpartisan economic policy organization dedicated to the advocacy of tax, energy, environmental and regulatory policies that encourage saving and investment.

More On The Miami Dolphins' Owner Swimming For Better Capital Gains Waters

We mentioned recently that an owner of the Miami Dolphins NFL team is considering selling his share in the team as he worries about the tax implications of possible higher capital gains tax rates under consideration by Sen. Barack Obama. This morning the Wall Street Journal editorial page adds:

Mr. Obama is in fact proposing to raise the capital gains tax to 20% from 15% -- which would be an increase of 33%, but Mr. Huizenga is close enough for IRS work. His office confirmed to us that he stands by that statement, though he prefers not to elaborate on it. Mr. Huizenga also has NFL company. In July, we wrote about the Rooney family's musings about selling part of the Pittsburgh Steelers to avoid the 45% death tax rate.

We saw a similar tax effect in 1992 when Bill Clinton raised tax rates. The Wall Street crowd accelerated income, bonuses and stock sales to pay the 31% rate, not the expected higher rate. One of those who cashed out in 1992 was Robert Rubin, who would soon join the Clinton Administration.

"Capital gains tax on stocks may be straw that breaks camel's back"

Unfortunately, this headline comes from Vietnam, where "Some securities companies warn that the capital gains tax proposed to be introduced from January next year is too much too soon considering the gloom on the stock market."

NFL Owner Set To Punt Team Over Tax Liability Under New Capital Gains Regime

Who says capital gains tax rates don't affect investor behavior? That's a question that's easier to answer as one of America's richest men is eyeing capital gains tax rates and where they might be headed.

Dolphins owner H. Wayne Huizenga said Sunday no date has been set for selling up to 45 percent more of the team to Stephen Ross, but the presidential election is among the issues weighing on his decision.

That's because a Barack Obama administration is expected to mean higher capital-gains taxes.

"He wants to double the capital gains tax, or almost double it," Huizenga said. "I'd rather give it to charity than to him."

Give Me Back My Nest Egg

Government spending or tax cuts? As the clock ticks down until the election and the possibility of a lame duck session looms, a number of secondary economic stimulus proposals have already been raised (for the latest see Reuter's roundup here).

If policymakers really want to jump start things again, they need a package that will stimulate the economy, but more importantly stimulate confidence among investors in a free market that has failed them. Middle class Americans remain in shell shock over the dramatic plunge of their portfolios and the trillions they have lost. Before they wade back into the markets again, they need some reassurance of rebuilding their nest egg.

The devil of course is in the details, and in the coming months the ACCF will be looking to various policy options to help Americans get their nest egg back.

If the free market is to prevail, we need to inject confident invesmtents and people need incentives to remain for the long haul.

Kudlow: McCain Should Be Talking Cap Gains Tax Cuts

A great column by Larry Kudlow suggests that McCain should be reaching out directly to investors by talking about his 7.5 percent capital-gains tax cut and his $15,000 capital-loss tax deduction. Kudlow says he also needs to connect his tax cut proposals with middle class Main Street America...

But if Sen. McCain can get the capital-gains tax cut into his message, and if he can repackage the corporate tax cut as a Main Street tax benefit, he would stand a much better chance of getting his margins up with the heavy-voting investor class.

The just-released IBD/TIPP poll shows McCain has retaken the lead among investors with a small margin of 45-43 over Obama. Yesterday Obama was plus-2 among investors, and the day before he was plus-6. So something positive may be going on here for McCain.

Remember, Bush won investors by 11 points in 2004. And no Republican can win the presidency without a big investor vote margin. However, McCain is trailing Obama among married women, 46-42. He should be ahead by 10. And he’s only getting 65 percent of the conservative vote, whereas he should be getting 75 or more. Overall, IBD/TIPP has Obama plus 5.3, almost identical to the RealClear poll average of 5.2 percent. Rasmussen shows Obama at plus-4; Zogby has him plus-6; and Gallup has him plus-5.

So my advice to Sen. McCain is to start talking capital-gains tax cut to 7.5 percent. It’s a winner with the stock market sagging badly. Stocks will come back — in fact there’s a mini rally cooking right now. And a low cap-gains tax is a great incentive for investor-class wealth creation. Obama is going to penalize investors. But McCain will reward them.

Comparing cap gains policies of the pres candidates

Interesting story by CNNMoney on the cap gains components of the economic plans presented by Obama and McCain...

For the candidates, changing the tax rate stems from their economic philosophies. McCain believes tax cuts stimulate growth, while Obama wants to shift the more of the tax burden from the middle class to the wealthy.

While adjusting the rate would impact the deficit - at a time when the federal government needs money - experts said the measures should be examined as part of the candidates' overall economic policies.

That said, Obama will have a tough time getting an increase in the capital gains rate through Congress if the economy remains weak, said Joel Slemrod, director of the University of Michigan's Office of Tax Policy Research. It's always harder to pass a tax increase during a recession.

Whoever wins will have to address the capital gains tax by the end of 2010, when the current 15% rate is set to expire. The rate will then revert back to 20%, where it stood before the Bush administration changed the tax laws in 2003.

Boehner and GOP propose suspending cap gains

Last week bailout, this week economic stimulus. House Democrats have unveiled a plan to inject more money into poor and middle class families. Shortly thereafter Boehner and the House GOP announced their strategy for stimulus...

In the eight-point proposal, Boehner said that energy companies should be able to obtain leases in a matter of months — rather than years — to drill for oil on the Outer Continental Shelf. He noted that would allow earlier production that would grow the economy through job creation and lower energy costs.

He also argued that a combination of suspending capital gains taxes temporarily and lowering the corporate tax rate would encourage the investment of capital in foreclosures and other distressed assets.

KGs Tax Revenue - Forecast vs Actual

Experts and pundits will no doubt be debating the economic plans outlined by both presidential candidates this week, but when it comes to the benefits of lower capital gains tax rates a picture is worth a thousand words...

McCain: Cap Gains at 7.5% for Two Years

Once holding rates firm at 15%, Senator John McCain now advocates cutting rates on KGs to 7.5% from 15% for 2009 and 2010...

The McCain plan would reduce the tax on long-term capital gains to 7.5% from 15% for 2009 and 2010. The campaign said this would "strengthen incentives to save, invest and restore the liquidity of the markets." That would cost $10 billion.

He also wants to increase the amount of capital losses that can be used to offset ordinary income from $3,000 to $15,000.

New National Journal Economy Blog

Be sure to check out the new economic policy blog from National Journal. I'm honored to be included among the many who's who of contributors as it follows the latest news on the financial downturn, the bailout and how congress and the presidential candidates are responding.

The Latest From The Candidates

New York's Newsday has a great roundup this morning as voters try to understand differences between the presidential candidates' position on taxes. Here's the take by Randi F. Marshall:

The differences are clear - but the details aren't simple.

Barack Obama has said he would lower or hold taxes steady for everyone earning less than $250,000 and raise taxes on those with incomes above that threshold. He talks about "fairness" in the tax system, saying lower- and middle-income families should get the most relief.

John McCain offers broader and larger tax cuts, by making President George W. Bush's tax trims permanent. Low-income taxpayers would get less of a reduction, but high-income households and corporations would get cuts, too. McCain says more disposable income among high-earning families, business owners and investors will trickle down to everyone else.

Take the Rich Test...

Our dear colleague and former executive director, Dr. Richard Rahn, prescribes an economics lesson on the differences between wealth and income. Both presidential candidates (and the next Congress) should take note-

Many politicians and media people confuse taxable income with disposable and in-kind income. Because of the highly progressive income tax system, (97 percent of income taxes are paid by the top 50 percent of income earners and the top 1 percent pays 40 percent of the tax, despite having only 20 percent of the income), the difference in high-income and low-income families in after-tax income is far less than pre-tax income. In addition, there are many government welfare and subsidy programs for low-income people that are not included in many of the standard definitions of income.

Given that high marginal tax rates on income are counterproductive, some have argued for a wealth tax, but that doesn't work either. A wealth tax mainly taxes productive capital, thus reducing job and productivity growth, and it also encourages people to move their wealth to other countries and/or engage in extravagant expenditures - as the French have found out, much to their regret.

Mr. Obama also says that he wants to increase the capital gains tax. Many people have times in their lives when they reap a substantial capital gain from the sale of a farm or small business or a vacation home, etc. If they receive a couple of hundred thousand dollars or more from the capital gain, they appear to be "rich" in that year, according to Mr. Obama's definition, even though they may have an average yearly income of less than $100,000 and net assets of less than a half-million dollars. They will not only be taxed at a higher rate, but if the asset has been held for many years and has grown in value no faster than inflation, they will be taxed on imaginary income, and may well suffer a real loss - which is not only economically destructive but immoral...

Next President Must Restore Faith in Capitalism

Just when national anxiety over the financial downturn couldn't seem to get any worse comes a Sobering headline in today's Wash Post which asks if this is "The End Of American Capitalism?"

The worst financial crisis since the Great Depression is claiming another casualty: American-style capitalism.

Since the 1930s, U.S. banks were the flagships of American economic might, and emulation by other nations of the fiercely free-market financial system in the United States was expected and encouraged. But the market turmoil that is draining the nation's wealth and has upended Wall Street now threatens to put the banks at the heart of the U.S. financial system at least partly in the hands of the government.

The Bush administration is considering a partial nationalization of some banks, buying up a portion of their shares to shore them up and restore confidence as part of the $700 billion government bailout. The notion of government ownership in the financial sector, even as a minority stakeholder, goes against what market purists say they see as the foundation of the American system.

Yet the administration may feel it has no choice. Credit, the lifeblood of capitalism, ceased to flow. An economy based on the free market cannot function that way.

The next president won't assume office for 74 days after the election. In that time he must take every measure possible to restore confidence among the electorate and the markets that the free market will recover and that capitalism still reigns as supreme.

Will Obama Raise Cap Gains Tax

ABC News had an interesting exchange with Obama over KGs:

Earlier this year, we saw Obama confronted with the argument in the vein of, "hey, traditional left-politics may not bring us the results we want." And his response was... well...

GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.

But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

OBAMA: Right.

GIBSON: And George Bush has taken it down to 15 percent.

OBAMA: Right.