Here is a new Cato study on capital gains tax rates:
With rates scheduled to rise in January, the study describes the six reasons why capital gains tax rates should be kept as low as possible.
The piece also notes that the new top U.S. capital gains tax rate in January of 28% will be much higher than the 16% average in the OECD.
Here is the study:
And here is a related IBD op-ed.
The top federal tax rate on capital gains is set to increase from 15% to 23.8% in January. The expiration of the Bush tax cuts will push up the rate by 5 points, and the new ObamaCare investment tax will add an additional 3.8 points.
Some policymakers view low capital gains taxes as an unfair loophole. But capital gains are unique, and low rates on gains boost entrepreneurship, investment and growth.
The average tax rate on capital gains among the 34 nations of the Organization for Economic Cooperation and Development is just 16.4%, By contrast, the U.S. rate including both federal and state taxes will jump to 27.9% next year.
U.S. policymakers need a refresher on why capital gains tax rates should be kept low.
1. Inflation. If an individual buys a stock for $10 and sells it years later for $12, much of the $2 in capital gain may be inflation, not a real return. Inflation — and expected inflation — reduce real returns and increase uncertainty, which suppresses investment, particularly in growth companies.
One solution is to index capital gains for inflation, but most countries instead roughly compensate for inflation by reducing the statutory rate on gains or providing an exclusion to reduce the effective rate.
2. “Lock-In.” Capital gains are taxed on a realization basis, which creates lock-in. Taxpayers delay selling investments that have large unrealized gains to avoid the tax hit. As a result, people hold assets too long and forgo beneficial diversification opportunities.