Should Capital Income Be Taxed? And If So, How?

53 Pages Posted: 24 Sep 2015 Last revised: 30 Nov 2015

See all articles by David Ingles

David Ingles

Australian National University (ANU) - Crawford School of Public Policy - Tax and Transfer Policy Institute

Date Written: August 1, 2015

Abstract

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

Suggested Citation

Ingles, David, Should Capital Income Be Taxed? And If So, How? (August 1, 2015). Tax and Transfer Policy Institute Working Paper No. 4/2015, Available at SSRN: https://ssrn.com/abstract=2664385 or http://dx.doi.org/10.2139/ssrn.2664385

David Ingles (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy - Tax and Transfer Policy Institute ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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