Taxing Capital Income

Abstract

This paper provides an overview and assessment of alternative methods of taxing capital income. We begin by considering why, and to what extent, capital income should be taxed. Having established a reasonably robust case for such taxation, we then review the difficulties of taxing capital income within the comprehensive income tax framework. We acknowledge that the comprehensive income tax approach could be problematic and review newer business tax initiatives, including the dual income tax, the comprehensive business income tax, and the various types of cash flow business taxes, including the allowance for corporate equity. These approaches mostly place heavier reliance on the business tax rather than the personal tax as the vehicle for capital income taxation. The cash flow taxes can be combined in various ways with personal taxes on consumption and wage income. We find that the different approaches to taxing capital income have their own particular advantages and disadvantages.