Should Capital Income Be Taxed? And If So, How?
53 Pages Posted: 24 Sep 2015 Last revised: 30 Nov 2015
Date Written: August 1, 2015
There are three main approaches to taxing capital income, being the income tax, the expenditure tax – which effectively exempts most capital income - or hybrids such as the rate of return allowance (RRA). This paper considers the theoretical arguments for taxing capital income less than fully, and finds that they need to be qualified. A strong case can be made for at least taxing that component of capital return which is above the risk-free rate (e.g., the bond rate). While the RRA favoured by the Mirrlees Committee does this, it is administratively cumbersome and the author proposes a new approach called the Z-tax which uses cash-flow tax principles to arrive at an end result which can be made similar to the RRA.
Keywords: Capital income taxation, expenditure tax, consumption tax, comprehensive income tax, rate of return allowance, Z-tax
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