Estimating the economic effects of reintroducing the holding period for securities

This study by the economic research institute EcoAustria examines the effects of the reintroduction of a withholding tax retention period and its impact on key macroeconomic indicators of the Austrian economy. The calculations illustrate the benefits of this policy measure. In principle, it lowers the required rate of return for companies and makes Austria a more attractive destination for investments by domestic investors.

This is accompanied by an increase in investment activity and rising productivity. The increase in investment activity also leads to an expansion in employment. This ultimately increases national income. The estimates carried out here show economic effects that can be classified as substantial.

Positive effects on the Austrian economy
Investments could rise by up to 2.5% and employment could increase by 0.3%. Overall economic productivity will rise by around 0.3%, which will ultimately be reflected in a 0.8% increase in national income. In view of these effects, the reintroduction of a tax retention period makes economic sense. It also shows that private households react with a higher propensity to save and that savings increase in the long term. The savings rate rises by up to 2.1 percentage points. The main motives for adjusting the savings rate are old-age provision and precautionary savings.

In order to strengthen the equity base on a broader scale, a retention period in combination with the abolition of capital gains tax should be preferred not only for shares in stock corporations, but also for shareholdings in limited liability companies. In addition, the tax treatment of distributions (e.g. dividends) is also relevant if the equity base of companies is to be improved and a more investment-friendly environment created. In an international comparison, several countries provide for preferential tax treatment in combination with retention periods and shareholdings in limited liability companies. In the Czech Republic, for example, capital gains from shares in a GmbH are tax-free if they are held for at least five years.

"One of the most important effects of capital gains tax is the "lock-in" effect. This means holding on to an existing investment even though there are potentially better investment opportunities. In addition, the capital gains tax makes the required rate of return on investments more expensive and thus inhibits investment activity. Furthermore, capital gains tax also reduces the incentive to become entrepreneurially active," says Monika Köppl-Turyna, Director of EcoAustria, summarizing the disadvantages of capital gains tax.

High leverage effect through a reduction in capital gains tax
From an economic point of view, a reduction in capital gains tax leads to an increase in investment and the capitalization of employees. This is associated with higher productivity, which in turn is reflected in higher wages. Studies on the effects on public finances show that a reduction in company-related taxes has a high degree of self-financing, i.e. the tax loss is lower compared to other levies.

However, it is not only the amount of capital gains tax that is relevant. The retention period, after which capital gains are tax-free, also plays an important role in the economic consequences. Findings from the economic literature show that in countries that provide for a lower tax burden for long-term investments compared to short-term investments, companies make more investments.

Effects on savings behavior
With regard to the savings behavior of private households, the abolition of the retention period has two opposing effects. On the one hand, private households increase their savings - also with regard to private pension provision. On the other hand, the higher income from savings reduces the incentive to build up further savings. The first effect is likely to predominate for households with higher incomes and in times of strong economic growth. The second effect is more relevant for low-income households and in times of weak economic growth.

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Study - Re-introduction of retention period for securities

Table 1: Marginal tax rate for capital gains tax (taking into account the retention period)

Table 2: Summary of the results