Comparing U.S. Capital Taxes to those at Other Countries

Nations (or at least the smart ones) appropriately want investment in their economies as a means of creating jobs, decreasing the cost of capital, and raising the standard of living. Taxes on capital formation discourage such desired investment. Unless prevented by currency restrictions (which will in the long run really inhibit capital formation), capital can quickly move to where it is most advantageous. All other things being equal, both international and U.S. investors will place their money in countries with lower taxes.

I attempt (as should every investor with even modest amounts) to diversify my retirement funds into different countries. This spreads the economic and political risks of unforeseen circumstances. For this reason, although most of my investments are still in U.S., I also have investments in companies elsewhere.

Each year, as I read my Form 1099 from my brokerage account, I am struck with how large U.S. taxes on dividends (capital) are when compared to what other countries do. In the U.S., there is a 30% withholding tax on dividends for those who are not already filing a U.S. tax return. President Obama has repeatedly proposed that this 30% also be the minimum tax on interest and dividends for just about anyone who is affluent enough to have any real money to invest. Compare this U.S. 30% rate to the rates I paid on investments in other countries:

  1. Average of 4 international ETFs 5.9%    (Includes countries with no withholding tax)
  2. Japan                                  7%
  3. China (Peoples Republic) 10%
  4. Brazil                                 15%
  5. Canada                              15%
  6. France                                15%
  7. Switzerland                         15%
  8. Korea                                  16.5%
  9. Spain                                   19%
  10. Israel                                   20%
  11. Taiwan                                20%
  12. Germany                             26%
  13. Italy                                     27%
  14. Argentina                            27%

The above is not a comprehensive analysis, but is instead a summary of my 2011 Form 1099. However, the overall average sustained by the four funds is representative of worldwide investment opportunities. Numerous countries have no withholding tax on dividends, which is why the average (as well as each the funds individually) of the exchange traded funds (ETFs) are the lowest percentages listed.

If you were an investor, where would you want to invest? One might attempt to justify the higher U.S. taxes based on the premise that the U.S. has less political risk, but many are appropriately beginning to doubt that this remains entirely the case. One need only read/listen to the commentary of some of the U.S. socialists who are already in public office to get a bit worried that U.S. expropriation (i.e., the politically-motivated and forceful confiscation and redistribution of private property) is an increasing U.S. risk.

As we listen to large portions of U.S. society demonize “the rich”, one should reread the above taxation list, and consider where the U.S. is in its capital formation policies. Capital formation remains an important element in a healthy and growing economy. As a country, we might want to thank the rich (or at least their money) more, and take a less threatening and adversarial position.

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