Well, Megan’s got half of a good idea.

Income is income, and I have never worked out why our tax code so strongly favors day traders and heiresses over the rest of us.

…the other half of Megan’s idea is based on the canard that “corporations don’t pay taxes”–only individuals do, whether directly or indirectly (through reduced wages and dividends).

Of course, it’s just as easy to say that individuals don’t pay taxes–only corporations do, either directly or indirectly (by paying higher wages so that workers can pay their income tax). So maybe we should abolish the individual income tax, instead.

The corporate tax rate should be dropped to zero temporarily-end of 09. We should stop focusing on industrial output and instead promote service sector and tech growth. American companies should be encouraged to aggressively pursue markets in China and India.

The stimulus projects should be accelerated. Nuclear plant permits must be approved quickly. Smart grid, Web 2.0, and pollution control must be properly funded and pursued. Finally, we should invest heavily in robotics- military and commercial, AI, and wireless network technology.

“while raising all capital gains and dividend taxes to the general rate of income tax.”

The argument against cap gains being taxed at the level of all income has been that part of cap gains equates to inflation and so shouldn’t be taxed, a fair enough point.
Of course what could be done is to task the IRS or CBO or CEA or any of a dozen other universities with creating a little table every year giving deflators for the past 50 years or so to be used in calculating cap gains, for people who track lots anyway, and some sort of averaged version that is considered to be reasonable for most small investor situations — or task the mutual funds and such to track this date information and provide the relevant numbers, the same way they track the averaging over lots right now.

But I suspect Meghan is well aware of this, and her suggestion is part of the standard GOP ratchet — first get corporate taxes abolished, as part of this deal, then, once that is done, point out “Oh my, this isn’t really correct, to increase cap gains so much. Tell you what, how about we just leave them where they are.”

I used to believe that the corporate income tax should be eliminated, in combination with increasing capital gains and dividends to the ordinary income rates, but the recent financial debacle has changed my mind. I no longer believe that corporations are able to act in their best interest, so I don’t want them to be able to hoard their profits. The economy itself is a national asset, and the value of the economy depends on constant re-investment of profits. Corporations that do not re-invest profits are contributing to the devaluation of the economy, and with the decline in private investment, the government has had to replace the spending normally done by businesses, and it’s going to end up being very inflationary.

So instead of eliminating the corporate tax or keeping it the same, I think we should dramatically raise the tax rate, in combination with significant investment tax credits. Companies that re-invest their profits, or distribute them to shareholders as dividends (which should be deductible as a corporate expense), will pay little or no taxes. Those who chose to not re-invest will pay the higher tax rates, and will make campaign contributions to politicians who promise to lower taxes.

With this system, profits will always be re-used, either by the company that earns them, by the shareholders, or by the government.

As far as capital gains goes, the tax rate should be inversely proportional to the length of time the asset was owned. Less than a year, 60% tax. 1-2 years, 50% tax, and so on, if it’s more than 10 years, 10% tax. We want the tax code to reward investment, not speculation. We also do not want short term results to drive investment decisions.

There are so many changes we could make to the tax code that would be better than what we have now, but as long as we have congressional campaigns funded by those who want to pay as little taxes as possible, no changes will occur, other than the self-destructive tax cuts of this past decade.

The opportunity for clever tax dodges is minimized when all tax rates are the same: corporate, individual, dividends, capital gains, interest, etc.