Comments on: Treasury answers your tax questions A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: comment1 Mon, 15 Nov 2010 14:29:17 +0000 The alternative way to deal with the lock-in effect (at least for publicly-traded securities) is to tax them on a mark-to-market basis. That removes tax planning from the investment decision. It also taxes shareholders and wage-earners equally on their economic income. For a proposal to do exactly that for large corporations and the wealthiest and highest-income individuals, see See  /120505MillerTaxNotes.pdf and eetings/docs/miller_052005.ppt

By: TimWorstall Sat, 13 Nov 2010 09:34:27 +0000 “More interesting is the way that Mundaca defends the way in which dividend and capital-gains tax rates are lower than income-tax rates. I’ve never understood it, ”

There’s an important point from the basics of the economics of taxation here. As ever, there’s a trade off.

All and any taxes have deadweight effects. There’s economic activity that doesn’t happen because of the tax. And yet we must have taxes for we’ve got to pay for the State in some manner (let’s leave aside the argument about how much State and thus how much tax we’ve got to have for a moment).

The thing is, different taxes have different deadweight costs. It is entirely uncontroversial (meaning that you could get everyone from Tyler Cowen through to Krugman, Stiglitz and the younger Galbraith to sign up to it) that there is an ordering of taxes, from lowest deadweight costs to higer.

From taxes on immovable property and land, to consumption taxes, to income taxes and then, the most cost for the revenue raised, on capital and corporate profits.

As, over the long term ,economic growth is what we actualy desire, we therefore want to raise the money we need at the least cost to that future growth. Which is why we should be taxing capital and corporate profits less heavily than income. Indeed, shifting tax from those two to, say, property taxation, provides us with a free lunch. We get both more of the growth we desire and also the money we need to run the State.

In fact, we can actually go further than this. Imagine that you wanted a high tax, high services social democracy (like, say, the Nordics). But you also wanted to have some economic growth (like, say, the Nordics). In order to be able to raise the money you want you therefore need to be raising it with the fewest deadweight costs. Like, say, the Nordics do.

Capital is taxed lightly, as are corporate profits. Income taxes are high, yes, but the real tax burden is upon consumption in the form of a heavy (25%!) VAT.

If you tried to get the same revenue by taxing capital and corporations it’s very doubtful that you’d have any growth at all.

So that’s why we do and should have lower capital and corporate taxation: because raising the money we want and need in other areas costs us less in growth foregone for the revenue raised.

By: dWj Fri, 12 Nov 2010 23:33:22 +0000 I would think indexation of cost basis would be better than a kind of crude approximation with a different rate. (I would index cost basis fairly aggressively, but would tax any gain over that adjusted basis at usual income tax rates.) Is it thought that this would be too complicated?

In a world with only a single, risk-free asset, I wouldn’t tax gains on previously taxed capital at all, but it’s clear that some of the returns people get are real, and not simply time-shifting of consumption.

By: absinthe Fri, 12 Nov 2010 22:55:13 +0000 “[C]apital’s always going to flow to where it gets the best return.”

Yes… the best tax-adjusted return. That’s his point there.