A Securities Tax and the Problems of Taxing Global Capital
46 Pages Posted: 11 Jul 2020
Date Written: June 2, 2020
An earlier paper, How to Tax Capital, 70 Tax L. Rev. 1 (2016), proposed a new approach to taxing capital owned by U.S. households and nonprofits. The cornerstone is a flat periodic tax on the market value of U.S. publicly traded securities. An annual tax rate of around .8 percent (80 basis points) would roughly approximate the average tax burden on capital income in the U.S. under the existing patchwork system for taxing capital income. A security issuer would remit the tax based on the market value of its securities. A security issuer would receive a credit for U.S. publicly traded securities it holds so that wealth that is represented by a string of publicly traded securities would be taxed once. Wealth held in forms other than publicly traded securities (e.g, private equity and closely held companies) would be taxed by a complementary tax at the same rate on their estimated value. The earlier paper explained why the securities tax is superior to the individual income tax and the corporate income tax as a tax on capital. It eliminates most distortions created by the existing system, it is easy to administer, and it is impossible to evade other than by holding wealth in illiquid forms (which is costly).
This paper examines how the securities tax would function in a global context assuming that other nations do not change their approach to taxing cross-border investment. The current system involves a bifurcated tax on capital income with the nation in which capital is used imposing a company-level tax on income and the state in which owners of capital reside imposing an owner-level tax of dividends, interest, and capital gains. The securities tax is a unitary tax on capital imposed at the company level. Integrating a unitary tax with the current bifurcated system requires several modifications in the securities tax: the corporate income tax would need to be retained to tax foreign direct investment in the U.S.; the U.S. would probably want to give a U.S. company a partial credit against the securities tax for foreign taxes paid by a company on foreign source income; and the U.S. probably would want to rebate a significant part of the securities tax to identified foreign owners of U.S. securities (the rebate would not be paid to unidentified owners). These modifications would mean that the securities tax would not remedy the problems that currently plague the taxation of global capital. One modest benefit is that not rebating the tax to unidentified foreign owners of U.S. assets would allow the U.S. government to share in the profit from the U.S. serving as a haven for hidden wealth, which would make the U.S. somewhat less attractive as a haven. But the modified securities tax would be no worse than the status quo with respect to taxing cross border investment.
Keywords: Tax, Corporate Tax, International Tax
JEL Classification: K34
Suggested Citation: Suggested Citation