Tax Analysts Blog

Capital Gains from Copenhagen to Bakersfield

Posted on Feb 27, 2013

The Tax Foundation released a report recently that showed California had the second highest capital gains tax burdens – in the world. The top rate you would pay if you lived in Sacramento, San Diego, San Francisco, or San Bernadino is a whopping 33 percent. That of course is not only California’s take but includes the new and improved federal taxes on capital gains. Taxation of capital is one of those tricky things that politicians should think about more than they do. You see, most capital is mobile. You can own most investments anywhere and more importantly you can move the location of your investments just about anywhere. Now if you invested in a golf course or an alpaca farm you probably can’t move the physical assets very easily. But you might invest in an alpaca farm in Texas where the rate is 23.8 percent – all from the feds.

More likely though, you are investing in intangibles. Intangibles defy geographical boundaries because, well, they are intangibles. When you tax something that can be moved it often moves. We can argue about whether rich people pick up and leave their mansions, quit the country club, and yank their kids out of fancy schools over high taxes. I suspect in the short run they won’t. But sophisticated rich people will change where they invest their money. More importantly mobile capital will be hesitant to locate in a state that taxes capital heavily. So maybe it’s not so smart to vie for the top capital gains rate in the world.

The states with the highest capital gains rates are California, New York, Oregon, New Jersey, Vermont, District of Columbia, Maryland, Maine, Minnesota, and North Carolina. They all have top marginal rates at or over 29.7 percent. Sweden is a tax haven by comparison to these states. Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have the lowest top capital rates (all 23.8 % and all federally imposed).

You may be wondering who is number 1? No it’s not France which comes in at number 3. It’s Denmark which has a top capital gain rate of 42 percent. I confess I do not know much about Denmark. I know a guy from Norway who always makes Danish Jokes. (What’s the difference between Norway and Denmark? Denmark has nice neighbors!) Here is what you need to know about Denmark besides the fact you are up the creek if you are in the investor class. Fun to play with Legos and excellent to drink Carlsberg beer are from Denmark. Kirkegaarde (“The tyrant dies and his rule is over, the martyr dies and his rule begins”) and Hamlet (“I will speak daggers to her, but use none”) were from Denmark as well. And, in addition to free medical care, a college education is free as well. Everyone I know who has been to Denmark loves the country. But I cannot help wondering where people in Denmark invest their money.

Read Comments (2)

AMT buffFeb 27, 2013

For Californians in the AMT exemption phaseout range (up to about $400k) the
marginal rate are quite a bit higher. The federal rate is 20% plus 8% for
phaseout of AMT exemption plus 3.8% for Medicare tax plus the full state rate
of 9.3% or 10.3%, since this tax on not deductible under AMT. The total
marginal rate on long-term capital gains is 41.1% to 42.2% for these affluent
but not rich taxpayers.

vivian darkbloomFeb 27, 2013

The Tax Foundation report relates to the total capital gains tax rate for
*individuals*. Yet, you write "Intangibles defy geographical boundaries...".
That second paragraph is terribly misleading if we're talking about tax at the
individual level.

In California, in the United States, and indeed in almost all of he developed
world, the taxation of capital gains is, at the individual level, based on the
domicile or residence of that individual and not where the "'intangible" is
legally located.

The taxation of real property is normally taxed both by the jurisdiction where
the real property is located and where the individual owner resides or is
domiciled; however, even changing the location of a real estate investment is
not going to save a California resident a penny at the individual level. It
might save a person some money if that person resides in a country that employs
the exemption method of double tax relief; but, that method does not apply in
California, or anywhere else within the United States, as far as I know.

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