The High Burden of State and Federal Capital Gains Taxes

February 20, 2013

U.S. Among Highest in Taxes on Investment

Washington, D.C., February 20, 2013—Capital gains tax rates in the U.S., recently raised in January, are now among the highest in the world, causing a drain on the economy and putting the U.S. economy at a competitive disadvantage, according to a new analysis by the Tax Foundation.

“As Congress begins debating tax reform, members need to take a serious look at the U.S. capital gains tax rate,” said Tax Foundation economist Kyle Pomerleau.

At the beginning of this year, the top marginal rate on capital gains was raised from 15 percent to 23.8 percent. Although lower than the tax on ordinary income, states also tax capital gains, some of them as high as 13.3 percent, adding an additional burden to savers and investors. Some taxpayers could pay up to a 33 percent tax on capital gains, a rate that far exceeds rates throughout the world.

While there is not much lawmakers in Washington can do about state tax policy, they can be mindful of the combined effects of state and federal policies. With a combined state and federal average rate of 27.9 percent, investment in the U.S. is at a severe competitive disadvantage. Investors could easily start looking for higher rates of return in other countries with much lower tax rates or simply choose to reduce domestic investment and instead consume more.

“This high tax rate has long-term negative implications for the economy as people save and invest less and capital seeks higher returns in other countries,” said Pomerleau. “Lawmakers should consider the negative economic impacts of such a high tax on investment and look to lower it in any tax reform package.”

The United States risks losing its competitive edge as other countries continue to reform their tax systems to attract businesses and promote economic growth. A high tax burden on capital gains harms growth and prosperity. Most of the world’s leaders have already realized this, and as a consequence the United States is falling farther behind.

Tax Foundation Fiscal Fact No. 362, “The High Burden of State and Federal Capital Gains Taxes” by Kyle Pomerleau is available here.

To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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