California: Second Highest Capital Gains Tax Rate in the World

By Patrick Burke | February 22, 2013 | 4:05pm EST

(AP Photo)

( -- California has a combined state and federal tax rate on capital gains of 33 percent, which is the second highest in the world, surpassing France, Finland, Ireland and Sweden, according to the Tax Foundation.

An analysis by the Tax Foundation examined the combined federal and state capital gains tax burden that affects individuals in each U.S. state, and compared them with capital gains rates in member countries of the Organization for Economic Cooperation and Development (OECD.)

After the House of Representatives passed Senate-approved legislation on Jan. 2, 2013 to avert the so-called fiscal cliff, the top tax rate on capital gains still rose from 15 to 20 percent.  This placed the combined state and federal average at 27.0 percent, because capital gains income is subject to taxation at both the state and federal levels.

The combined state and federal long-term capital gains rate affecting those in California was higher than every other OECD country except Denmark.

The top capital gains tax rate in California at the state level is 13.3 percent, the highest in the nation (and the federal rate is 20 percent, for a total 33 percent capital gains tax).  The top five states with the highest capital gains rates (federal and state combined) in the United States were California, New York, Oregon, New Jersey and Vermont, respectively. (The data focus on "long-term" capital gains, which are the returns received from assets held for more than one year.)

The top 10 country/state with the highest capital gains tax rates are as follows:

Denmark         42%

California        33%

France             32.5%

Finland            32%

New York       31.4%

Oregon           31%

Delaware         30.4%

New Jersey      30.4%

Vermont          30.4%

Maryland         30.3%

Some of the countries with the lowest capital gains tax rates are Japan, 10%, and Luxembourg and Switzerland, 0%.

The Tax Foundation analysis by Kyle Pomerleau explains that a tax on capital gains is applied to income that has already been taxed through other means. To illustrate this, the analysis explains that a wage earner purchases stock with taxable income.

After taking into account a corporate tax that takes away from the stock’s return, the worker is taxed once more by a capital gains tax when he decides to sell the stock and receive a profit.

Furthermore, the analysis argues that high taxes on capital gains incentivize American companies to move activities to OECD countries with lower rates.

“Relatively high capital gains taxes also harm the competitiveness of U.S. corporations by raising the cost of capital,” the analysis says. “As corporations seek higher returns, corporate investment will move to countries that have lower capital gains tax rates.”

The U.S. average capital gains rate of 27.9 percent was almost 11 percent higher than the average rate of OECD countries (17 percent.)

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