How are Capital Gains from the Sale of Stocks and Dividend Income Taxed? －Evidence from OECD Countries－
Asian Tax Journal Vol. 23 No. 6 (2022), pp. 113-145
Abstract
To mitigate differential taxation of dividend income against capital gains from the sale of stocks, the Korean government has established the financial investment income act taxed on minority shareholders’ capital gains. Due to a high basic deduction for financial investment income, there are conflicting arguments regarding the effect of the act. Therefore, this study investigates how dividend income and capital gains are taxed and then measures the effective tax rates in OECD countries. The taxation methods for dividend income include unadjusted－, imputation, reduction, and the non－taxation system. Most countries put a tax on dividend income in the same way other types of capital income are taxed (i.e., the unadjusted taxation). In addition, capital gains are mostly taxed seperately from ordinary income in OECD countries. However, when capital gains are taxed as ordinary income, long－term capital gains have a more favorable tax benefit than short－term gains. I calculate the effective tax rate and then measure the dividend tax penalty index, the taxation of dividend income relative to capital gains. Unlike Korea, both types of income are taxed equally in most countries such as the US and Japan. Moreover, in Korea it would be difficult to fully achieve tax neutrality between dividend income and capital gains even after the enforcement of the financial investment income act. These results imply that the simple taxation system for dividend income and capital gains needs to be adopted in Korea in the long－term
Keywords
- Dividend income tax
- Capital gains tax
- Effective tax rate
- Dividend tax penalty
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