Capital Gains Taxes: Washington Post Omissions

Washington Post reporters write a few thousand words on capital gains taxes today, and they somehow forget to mention the key economic factors in favor of a lower rate.

One factor is that the double taxation of corporate equity under an income tax system creates a serious economic distortion. Corporate profits are taxed at the business level and then again at the individual level by taxes on dividends and capital gains. Providing a lower rate for dividends and gains at the individual level is one way to partly alleviate the distortion.

Another factor is that inflation causes investment returns to be overtaxed in an income tax system without special rules to compensate. If someone buys a stock for $10 and sells it a few years later for $15, some portion of the tax paid will be tax on inflation. The effect of taxing people on inflationary gains is to reduce real returns and distort the tax code against investment.

These problems have led virtually every industrial nation to adopt special rules for taxing long-term capital gains. Most countries have either a reduced individual rate or a partial exclusion. About a dozen advanced economies – for example, the Netherlands and New Zealand – have long-term capital gains tax rates of zero. The Post managed to miss this international reality in its reporting.

The following chart from Global Tax Revolution shows capital gains tax rates in the high-income nations of the OECD. The chart is a little dated now, but it makes the point that our federal capital gains tax rate of 15 percent is pretty average – it is not some sort of unique right-wing giveaway to rich people, as the Post story implies.