How to Tax Capital
Mark P. Gergen
University of California, Berkeley - School of Law
February 13, 2016
Tax Law Review, Forthcoming
UC Berkeley Public Law Research Paper No. 2749422
This paper proposes a new system for taxing capital that can collect the same amount of revenue as the existing system with much lower administrative and compliance costs, and with somewhat lower distortionary impact. Its pillar is a flat annual tax assessed on the market value of publicly traded securities paid by an issuer. Wealth represented by a string of publicly traded securities is taxed once by giving an issuer a credit for amounts remitted with respect to publicly traded securities it owns. The securities tax will cover around 75 to 80 percent of income producing capital that is presently subject to the individual and corporate income taxes.
Income producing capital held by households and nonprofits that is not subject to the securities tax, e.g. interests in closely held businesses and real estate held for investment, is covered by a complementary tax. The complementary tax is paid on the estimated value of an asset assuming an investment yields a normal return in cash or appreciation. An entity is required to estimate value and remit the tax on an interest in the entity. If an interest is of a class, such as a unit in a private equity fund, then an entity is required to revalue all interests in a class when there is a redemption or trade of any interest in the class. This brings the incidence of the complementary tax roughly into line with the incidence of the securities tax with respect to relatively liquid assets, like interests in hedge funds, through periodic revaluations.
The securities tax and the complementary tax are intended to replace the entire existing patchwork system for taxing capital income. With an annual rate of .8 percent (.008) the securities tax and the complementary tax will impose a tax burden on capital roughly comparable to the burden imposed by the existing patchwork system for taxing capital that the two taxes are intended to replace. If the average real rate of return on capital is 4 percent, then the tax is equivalent to an income tax with a rate of 20 percent on the average real rate of return. From the perspective of a firm the tax raises the cost of capital by .8 percent or 80 basis points. A companion article will address the taxation of global capital under the two taxes.
Number of Pages in PDF File: 56
Keywords: tax, corporate tax, income tax, partnership tax
Date posted: March 27, 2016