On Tax Reform: Don’t Forget About Capital Gains Taxes

By SBE Council at 23 August, 2017, 9:41 pm

U.S. Capital Gains Tax Rate Ranks Poorly Internationally

by Raymond J. Keating-

As the tax reform debate heats up, it’s important to keep in mind that capital gains tax relief must be part of any pro-growth reform effort.

After all, a capital gains tax is a direct tax on the returns on entrepreneurship and investment, which, of course, are the key sources of innovation, productivity growth, income growth and economic growth. Taxing capital gains means reducing the resources available for and diminishing the incentives for undertaking the risky endeavors of starting up, operating and investing in a business.

Therefore, the capital gains tax inflicts harm on the overall economy, and on workers, who need the jobs, productivity improvements and resulting income gains generated by such risk taking.

For good measure, it must be recognized that financial capital moves in a global market, and will flow to those locales where it is treated well. Unfortunately, the U.S. has a high capital gains tax when compared to world’s largest economies.

In fact, as noted in Table 1, the U.S. top individual capital gains tax rate of 28.3 percent (i.e., the combined federal rate (23.8 percent) and the average state rate (just under 5 percent)) ranks 40th among the nations with the top 50 economies.

Table 1: Ranking the Top 50 Economies in Terms of Top Individual Capital Gains Tax Rate

Tax relief and reform should make the U.S. a global magnet for capital.

Given all of the other positives that make the U.S. an attractive place to invest, eliminating the capital gains tax would be a major policy achievement. It would provide major boosts to entrepreneurship, investment and our economy. At the very least, the total U.S. capital gains tax rate should be reduced so that it is lower than the average 18 percent rate prevailing among these 50 nations, such as bringing the federal rate down to 10 percent.

In the end, the less you tax something, the more of it you get. Our economy – as illustrated in recent SBE Council reports here and here – needs more entrepreneurship and more private investment.

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Sources on tax rates:

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.