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The Uneasy Case for Capital Taxation

41 Pages Posted: 13 Sep 2005  

Edward J. McCaffery

USC Gould School of Law

Date Written: September 2005

Abstract

The traditional view of tax holds that consumption taxes fail to tax the yield to capital, whereas income taxes do, leading to John Stuart Mill's criticism of the income tax as a "double tax" on wealth that is saved. A better analytic understanding illustrates that there are two types of consumption taxes. A prepaid consumption or (equivalently) wage tax indeed ignores the yield to capital. But a consistent progressive postpaid consumption tax gets at such yield, at the individual level, when but only when the returns to capital are used to elevate lifestyles in material terms. Such a tax allows "ordinary" savings that move around labor earnings, in constant dollar terms, to different periods of an individual's life, such as times of retirement or heightened medical or educational needs. Because a progressive postpaid consumption tax falls on the yield to capital at the right time - when its use at the individual level becomes manifest - all other taxes on capital, such as capital gains, gift and estate, and corporate income taxes, can and should be repealed, in the name of fairness.

Suggested Citation

McCaffery, Edward J., The Uneasy Case for Capital Taxation (September 2005). ; USC Law Legal Studies Paper No. 05-19. Available at SSRN: https://ssrn.com/abstract=802888 or http://dx.doi.org/10.2139/ssrn.802888

Edward McCaffery (Contact Author)

USC Gould School of Law ( email )

699 Exposition Boulevard
Los Angeles, CA 90089
United States
213-740-2567 (Phone)
213-740-5502 (Fax)

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