IF PRESIDENT JOE BIDEN He succeeds in raising America’s highest tax rate on federal capital gains and dividend taxes to 39.6%, having pledged to Congress on April 28 that it would be twice the average tax rate in Europe. However, this would only apply to the highest earning 0.3% of taxpayers: those who earn more than $ 1 million. The fact that countries cast their nets differently makes it difficult to compare taxes on capital, including taxes on businesses and real estate, as well as taxes on capital gains and dividends. The OECD, a club from mostly wealthy countries, does not publicly track members’ capital gains tax rates because of exceptions and outsourcing that make them difficult to compare.
Fortunately, it’s easier to compare how much money countries are collecting. America’s total capital taxes brought in roughly 5% revenue GDP According to an analysis by Spencer Bastani from the Institute for Labor Market and Education Policy Evaluation and Daniel Waldenstrom from the Research Institute for Industrial Economics, two Swedish think tanks in 2018. This corresponds to an average of 5.8% for a 16-person panel OECD Countries. What makes America special is the mix of capital taxes. The corporation tax increases the income relatively small (see graphic), while the income from the property tax is unusually high. Overall, America has fewer taxes than most rich countries. As a share of the total income, the capital tax amounts to an impressive 20% and is thus fifth among the 16 countries in the sample of researchers.
How much would Mr Biden’s plans change this picture? Working out the answer is just as difficult as making country comparisons. The suggested headings are straightforward. Corporate taxes would rise from 21% to 28%. And the rate of capital gains and dividends would almost double from 20% for top earners (who have a disproportionate share of wealth). However, assessing how saving and investing respond to capital taxes is one of the most hotly debated topics in business.
Investors can choose when to sell assets and when to pay capital gains taxes. American budget wonks typically calculate a revenue-maximizing investment income tax rate of around 28%. However, this is under the existing rules which actually waive inheritance tax if the heirs inherit it. Mr Biden wants to close this loophole so it may no longer be attractive to postpone capital gains indefinitely and include more of them in the tax network. With this change in mind, Penn-Wharton’s budget model states that Mr Biden’s proposal for capital gains over ten years would raise $ 113 billion. That is still relatively modest compared to the $ 1 trillion increase in corporate income tax proposed by Mr Biden. The combined revenue would be approximately 0.4% of the projected revenue GDP over the decade that would leave America still in the middle of it OECD Pack for the total capital tax.
Could Scorekeepers Underestimate the Revenue from the Capital Gains Tax Change? This is argued in a recent article by Natasha Sarin of the University of Pennsylvania, Larry Summers of Harvard University, Owen Zidar of Princeton University, and Eric Zwick of the University of Chicago for various technical reasons. Previous work by Mr. Zidar and Ole Agersnap, also of Princeton, indicated that a rate of 38-47% could maximize sales. However, the uncertainty surrounding these analyzes is high – the second paper is based on an extrapolation of taxes at the state level. And in any case, the revenue maximizing rate is not necessarily the same as the most desirable for society, notes James Poterba of the Massachusetts Institute of Technology.
Economic policy should take into account both the revenue and the drawbacks of the tax – and Congress will no doubt be debating this soon. ■
A version of this article was published online on April 28, 2021
This article appeared in the Finance & Economics section of the print edition under the heading “Benchmarking Biden”.