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New Study: Higher Capital Gains and Dividend Taxes Would PutU.S. Further Behind International Competitors

February 9, 2012    Bookmark and Share

Tax hikes could discourage investment in American businesses, slow economic recovery and job creation

Washington, D.C. – A report released today illustrates how U.S. investment tax rates are increasingly lagging behind international competitors.  The study, prepared by Drs. Robert Carroll and Gerald Prante of Ernst & Young LLP, calculates the  U.S. ‘integrated’ tax rates on capital gains and dividend income by combining taxes paid at the corporate and individual levels and compares the rates against Organisation for Economic Co-Operation and Development (OECD) and BRIC (Brazil, the Russian Federation, India and China) countries. 

The report also discusses the negative impact high integrated tax rates have on key economic factors including productivity, wages and decision making by investors and companies.

Key Findings from the Report:

  • The current top U.S. integrated dividend tax rate is 50.8 percent  - fourth highest among OECD and BRIC countries
    • This rate will rise sharply to 68.6 percent in 2013, significantly higher than all other countries measured
  • The current top U.S. integrated capital gains tax rate is 50.8 percent – fourth highest among OECD and BRIC countries
    • This rate will rise to 56.7 percent in 2013, the second highest among countries measured
  • Most developed countries provide relief from the double tax on corporate profits because it distorts important economic decisions that waste economic resources and adversely affect economic performance.
  • Higher taxes on dividends could reasonably lead to companies reducing dividend payments

“To get the full picture of the tax rates on capital gains and dividends received by individuals, you need to factor in taxes already paid on this income at the corporate level,” said Dr. Robert Carroll of Ernst & Young, LLP. “The U.S. already has one of the highest integrated tax rates among developed countries and it is scheduled to rise significantly next year.  Lawmakers need to consider this integrated rate closely because a further increase could discourage capital investment, lower productivity and real wages, and lead companies to favor risky debt financing.”

The study was prepared for, and released by, the Alliance for Savings and Investment (ASI).

“Capital is mobile and the U.S. risks losing ground to our competitors if investment tax rates increase,” said Jim McCrery, Manager of ASI.  “When these policies were enacted in 2003, they put us on relatively even terms internationally, but other countries recently seized the opportunity to lower taxes and attract new investment while the U.S. simply maintained the status quo.  Allowing these rates to increase in 2013 would place us further behind in the global economy and send the wrong signal to businesses looking to grow and create new jobs here in the U.S.”

Background on integrated capital gains and dividend tax rates:

  • The current 15 percent individual tax rate on investment income from dividends and long term capital gains was established in 2003 to reduce the effects of the double tax on corporate profits, which arises from subjecting corporate income to tax at both the corporate and shareholder levels.
  • The current tax rates will expire on December 31, 2012 without further action by the Congress and Administration.
    • The top federal statutory tax rate on dividends will rise from 15 percent in 2012 to 43.4 percent in 2013.
    • The top federal statutory tax rate for long term capital gains will rise from 15 percent in 2012 to 23.8 percent in 2013.
  • About four-fifths of OECD and BRIC countries tax capital gains at rates below the rates applied to ordinary income.
  • Thirty of the 34 OECD nations, and all BRIC countries, have lowered their statutory corporate tax rates since 2000.
    • Scheduled reductions in corporate income tax rates will further drive down competitors’ integrated dividend and capital gains tax rates .

About ASI:

ASI is a diverse coalition of dividend-paying companies, investor organizations and trade associations, formed in support of a common goal: to promote economic recovery, growth and job creation through policies that foster private savings and capital investment.

ASI’s top legislative priority is making permanent today’s current low tax rates on capital gains and dividends to provide certainty to investors, stability to the economy and a strong foundation for long-term economic growth.

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