Executive Summary
of the article
"Taxation and Valuation" (Tax Notes Federal, 164(7), 2019) :
- I explain the persistent failure of attempts to remove
tax-induced distortions of economic incentives. Its source is
fundamental impossibility to objectively evaluate the tax base.
- This can be completely avoided in the case of
publicly traded corporations. The solution is taxing them
in shares (to be promptly auctioned) rather than in cash.
- Stock capital includes (taxed) cost basis B and unrealized gains G.
Gains are tax-deferred now until they and dividends are taxed at
divestment. The deferral is remedied by t% corporate income tax.
I use below the interest i% paid by 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. IRS
collects both by periodically taking to auction t*i fraction of publicly
traded shares held in the private sector. Note that (2) is really a
neutral replacement: Investments can be split into B*(1-t) stock and B*t
bond portfolios. Bonds interest would buy back the auctioned B*t*i
shares, and tax-free divestment gives the original yield.
And keeping a fraction t of their capitalization in bonds, companies
and investors can just spend t% of their full return buying those bonds.
The bonds interest would buy back auctioned shares.
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 now does.
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