Low U.S. savings rate could harm nation's competitive strength
Countries use their national savings (of government, businesses, and individuals) to invest in education, factories, equipment, research, and development. These investments boost labor and capital productivity, allowing the design and production of quality products that can compete in world markets. When the level of national savings is low, the pool of funds available to meet the investment needs of the country may be too small. In such cases, the demand for funds may exceed the supply, pushing interest rates higher and thereby raising the cost of capital. Savings, therefore, are fundamental to the nation’s competitive strength and standard of living.
The U.S. national savings rate ranks as one of the lowest among all other major industrialized countries. One reason is the U.S. tax code’s bias against savings and investment; the United States has one of the world’s highest effective tax rates on capital.
Reducing the capital gains tax can expand the pool of capital thereby increasing productivity and the GDP.
Yet U.S. capital gains tax rates, which affect the cost of capital and therefore also influence investment and economic growth, are still high compared with those of other countries.
Long term individual gains face a tax rate of 20 percent in the United States versus an average of 14.8 percent for all the countries surveyed. In addition, the United States is one of only five countries that requires a holding period before an investment can qualify for a favorable capital gains tax rate.
Congress should continue to lower the cost of capital with further capital gains rate reductions for all assets and all taxpayers. Lower capital gains taxes would encourage taxpayers to unlock accrued gains, allow for more efficient uses of capital, stimulate business profitability and employment, increase the real and nominal value of GNP, add to capital formation, and build household net worth.