Executive Summary
of the article
"Taxation and Valuation"
(Tax Notes Federal, 164(7), 2019) :
- I explain the persistent failure of efforts to remove
tax-induced distortions of economic incentives. Its root is in
fundamental impossibility to objectively evaluate the tax base.
- This can be entirely avoided in the sector of
publicly traded corporations. The solution is taxing that sector
in shares (to be promptly auctioned) rather than in cash.
- Stock capital includes cost basis (B) and unrealized gains (G).
Gains are tax-deferred now until they and dividends are taxed upon
divestment. The deferral is remedied by corporate income tax (rate t).
Below, I use rates i of interest on special "constant value" bonds.
The proposed system replaces (1) corporate income tax -- with interest
on the deferred G*t, and (2) divestment taxes -- with interest on B*t.
To collect both IRS will periodically take to auction a t*i fraction of
publicly traded shares held in the private sector. Note that (2) really
is a neutral simplification: Investments can be split into B(1-t) stock
and B*t bond portfolios. Bond interest buys back the auctioned
B(1-t)t*i shares, and tax-free divestment matches the original yield.
The Treasury could match its bond income to the flat rate t tax on the
full stock market return (without tempting price manipulation). It
can vary i to keep the bond volume at fraction t of market capitalization;
then share auctions supply bonds interest. And companies and investors, too,
could unilaterally match their burden to such tax by keeping fraction t of
capital in bonds.
The system's main feature is that nothing companies and investors
do can change their tax (fraction t*i of shares), so business decisions
would be exactly the same as without taxes. No longer would taxes on
dividends and capital gains impede capital flow, companies would forget
the bewildering maze of tax laws, regulations, and precedents, and
Congress would still collect the same revenue it does now.
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