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If there were no tax on capital gains and income, which is the whole point of a consumption tax, businesses would have an incentive to distribute much more of t

by bjterry 12y ago

If there were no tax on capital gains and income, which is the whole point of a consumption tax, businesses would have an incentive to distribute much more of their retained earnings to shareholders. Part of the reason war chests have gotten so big is because dividends are disadvantaged to capital gains in the current tax code for many classes of investors. It's not totally clear that the scenario implied by innguest's comment was one of taxes on capital gains and income being removed, though. Keeping (a) income tax, and (b) tax on capital gains/income, and (c) adding a consumption tax, while removing the corporate tax on profits, doesn't seem like a particularly attractive scenario, especially as compared with moving completely to a consumption tax (which is the most favored tax among a consensus of tax economists).

humanrebar 12y ago
And if the problem is the regressive nature of the consumption taxes, why not address those issues at the source -- by instituting an Earn Income Credit or universal basic income?
notahacker 12y ago
You're quite right to point out that favorable tax treatment of capital gains over dividends encourages retaining earnings but replacing both with a massive new consumption tax is hardly likely to stimulate either a desire on the part of management to reinvest revenues or on the part of the shareholders to fund more consumption And for all its outspoken advocates like Kotlikoff, consumption tax is a long way from being "the most favored tax among a consensus of tax economists". If there's one thing you could get a majority of tax economists to agree on it's that tax on land ownership and various other forms of economic rent distort incentives less than most other taxes, but ironically that's more or less the complete opposite; a tax primarily on wealth. Trying to solve the regressive nature of pure consumption taxes with a Basic Income is basically squaring a circle: you lose vast amounts of tax revenue from point-one-percenters that spend very little of their taxable income, and pass that burden on to the general public. (Warren Buffett once commented that the percentage of tax he paid was less than some of his junior employees. Given his notoriously miserly spending habits, it's conceivable that the absolute amount of tax he paid would be lower than many of his employees under a pure consumption tax). It also overlooks arguably the most important benefit of higher income is not the ability to consume more in the future but the ability to work less. And to cap it all, it makes the tax free gains from speculative housing bubbles look very attractive, especially relative to investing in firms that make taxable goods.
dragonwriter 12y ago
> If there were no tax on capital gains and income, which is the whole point of a consumption tax, businesses would have an incentive to distribute much more of their retained earnings to shareholders. That's kind of a twisted way of looking at it. Insofar as there is a disincentive to distribute retained earnings, its because long-term capital gains are taxed as capital gains, but dividends are taxed both as corporate income and (currently, usually) as long-term capital gains to the recipient. Simply allowing expensing of distributions would equalize the tax treatment and eliminate the bias in favor of retained earnings, no change in the basic basis of the rest of the tax system is necessary to that purpose. Sure, eliminating the taxation of income (including corporate income and capital gains) entirely would also eliminate that bias, but its massive overkill if that's your only concern.
- bjterry 12y ago
  Allowing expensing of distributions would actually not equalize the tax treatment. If you could expense distributions it would be more favorable to do dividends than to retain earnings, because retained earnings (in the context of companies building up huge war chests rather than reinvesting retained earnings in the business) would still be subject to double-taxation (corporate taxes, then deferred taxes on capital gains), while dividends would be subject only to the tax on capital income, which is less than the combination of the other two taxes. I think.

by bjterry 12y ago

humanrebar 12y ago

And if the problem is the regressive nature of the consumption taxes, why not address those issues at the source -- by instituting an Earn Income Credit or universal basic income?

notahacker 12y ago

You're quite right to point out that favorable tax treatment of capital gains over dividends encourages retaining earnings but replacing both with a massive new consumption tax is hardly likely to stimulate either a desire on the part of management to reinvest revenues or on the part of the shareholders to fund more consumption And for all its outspoken advocates like Kotlikoff, consumption tax is a long way from being "the most favored tax among a consensus of tax economists". If there's one thing you could get a majority of tax economists to agree on it's that tax on land ownership and various other forms of economic rent distort incentives less than most other taxes, but ironically that's more or less the complete opposite; a tax primarily on wealth. Trying to solve the regressive nature of pure consumption taxes with a Basic Income is basically squaring a circle: you lose vast amounts of tax revenue from point-one-percenters that spend very little of their taxable income, and pass that burden on to the general public. (Warren Buffett once commented that the percentage of tax he paid was less than some of his junior employees. Given his notoriously miserly spending habits, it's conceivable that the absolute amount of tax he paid would be lower than many of his employees under a pure consumption tax). It also overlooks arguably the most important benefit of higher income is not the ability to consume more in the future but the ability to work less. And to cap it all, it makes the tax free gains from speculative housing bubbles look very attractive, especially relative to investing in firms that make taxable goods.

dragonwriter 12y ago

> If there were no tax on capital gains and income, which is the whole point of a consumption tax, businesses would have an incentive to distribute much more of their retained earnings to shareholders. That's kind of a twisted way of looking at it. Insofar as there is a disincentive to distribute retained earnings, its because long-term capital gains are taxed as capital gains, but dividends are taxed both as corporate income and (currently, usually) as long-term capital gains to the recipient. Simply allowing expensing of distributions would equalize the tax treatment and eliminate the bias in favor of retained earnings, no change in the basic basis of the rest of the tax system is necessary to that purpose. Sure, eliminating the taxation of income (including corporate income and capital gains) entirely would also eliminate that bias, but its massive overkill if that's your only concern.

bjterry 12y ago
Allowing expensing of distributions would actually not equalize the tax treatment. If you could expense distributions it would be more favorable to do dividends than to retain earnings, because retained earnings (in the context of companies building up huge war chests rather than reinvesting retained earnings in the business) would still be subject to double-taxation (corporate taxes, then deferred taxes on capital gains), while dividends would be subject only to the tax on capital income, which is less than the combination of the other two taxes. I think.