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Small Saver Incentives: An International Comparison of the Taxation
of Interest, Dividends, and Capital Gains
October 1998
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
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,
and 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 (accompanying
notes)
Return to text
|
| 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 (accompanying notes)
Return to text
|
| 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
Return to text | Return
to Table I | Return to Table 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
Return to text |
| 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
Return to text |
| 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. |
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