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The US would tax capital gains and dividends for the rich at the highest rates in the developed world if President Joe Biden’s proposal were implemented.
The top rate high-income Americans pay for dividends and the sale of valued assets would rise to nearly 49% if all federal and state taxes were combined, according to the Tax Foundation.
Ireland is the only other developed country that has a higher tax on capital gains – 51% on dividends. But when it comes to capital gains, the US would claim the highest top rate, according to the Tax Foundation.
(Unlike the US, many countries tax capital gains and dividends at different rates.)
“If the [Biden] If the proposal is accepted, we’re on top of the world, ”said James Hines Jr., Professor of Law and Economics at the University of Michigan and Director of Research at the Office of Tax Policy Research.
The US currently tax qualified dividends and long-term capital gains for the richest citizens at about 29%. (Again, this is a combined rate that includes state and federal taxes.)
According to tax experts, this tax is the average of the 37 nations of the Organization for Economic Co-operation and Development.
The highest 0.3%
There are, of course, many caveats to this analysis.
According to experts, the extreme differences in certain details make it difficult to compare the tax burden between countries.
For one, the US top rate would apply to relatively few taxpayers each year. Other developed countries charge their highest tax rate from a wider range of people.
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The Biden administration’s policies target the richest Americans – the top 0.3% – because, according to a White House official, they are often able to manipulate the tax system in their favor. It is therefore unfair to compare the top tax rate more broadly, said the official.
A recent ProPublica report found that some of the world’s richest executives – like Warren Buffett, Jeff Bezos, Michael Bloomberg, and Elon Musk – pay little to no tax on their net worth.
The richest taxpayers often receive income from so-called capital income such as interest, dividends and capital gains.
Biden’s proposal would raise the top tax rate on long-term capital gains and qualified dividends from 20% to 39.6% for taxpayers with annual income over $ 1 million.
(Under current law, taxpayers with incomes over $ 200,000 and married couples over $ 250,000 also have a 3.8% net wealth tax. Most states also impose a separate tax on capital gains and dividends – the average top tax rate is 5.2%, according to the tax foundation.)
Together that results in a top rate of 48.6%.
Denmark and Chile are the only other developed countries with a capital gains tax rate of at least 40%. And in terms of dividends, that’s only true for three countries: Ireland, Korea, and Denmark.
Biden’s proposal is part of a broader plan to raise taxes on households earning more than $ 400,000 a year to fund indigenous initiatives that largely benefit the lower and middle classes. The plan would also change capital gains taxes in other ways, including taxing valued assets on the death of an owner.
Progressive tax system
But most Americans would pay a much lower federal tax rate than the top rate.
According to Garrett Watson, senior policy analyst at the Tax Foundation, the US capital gains tax system is progressive compared to other countries.
Single taxpayers with incomes between approximately $ 40,000 and $ 446,000 will pay 15% on their long-term capital gains or dividends in 2021. Those with less incomes do not pay taxes.
The top tier includes many people in the UK while this would not be the case in the US
James Hines Jr.
Research Director at the University of Michigan Office of Tax Policy Research
But France, for example, has a flat tax rate of 30% on capital gains and dividends – that is, it applies to everyone, regardless of income. (High earners pay an additional 4%.) The Netherlands, Israel, Germany, Japan and Hungary also levy a flat tax.
Even in countries that do not have a flat tax, their top rate can encompass a broader segment of the population.
“The top tier includes a lot of people in the UK while the US doesn’t,” said Hines.
In addition, rules in developed countries can raise their tax rates to a higher level than it may initially appear.
For example, nine OECD countries – Belgium, the Czech Republic, Korea, Luxembourg, New Zealand, Slovakia, Slovenia, Switzerland and Turkey – have a 0% tax on capital gains.
But they tax dividends. And some levy a tax if the asset is not held for a period of time. In Slovenia, for example, the 0% tax only applies to assets that are held for at least 20 years. With shorter holding periods, the interest can be up to 27.5%.
In addition, according to Hines, the US states differ greatly in the way they tax capital gains and dividends.
For example, residents of Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington State, and Wyoming would not owe additional state taxes on capital gains, according to the Tax Foundation.
Its maximum rate, under Biden’s proposal, would be 43.4% (including the federal rate of 39.6% and net capital gains tax of 3.8%). By comparison, California, New York, and New Jersey would have combined for the richest residents more than 54%.