I explain the root of persistent failure of efforts to remove
tax-induced distortions of economic incentives. It lies in the
fundamental impossibility of objectively evaluating the tax base.
Distortions can be entirely avoided in the sector of publicly traded
corporations. Evaluation can be bypassed by taxing that sector
in shares (to be auctioned) rather than in cash.
Stock capital includes cost basis (B) and unrealized gains (G). Gains are presently tax-deferred until they are realized in divestment. The deferral is remedied by corporate income tax (rate t). Below, i is the variable interest rate on special constant value "cv-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 fraction i*t 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 in cv-bond portfolios. Bond interest buys back the auctioned shares, and tax-free divestment matches the original yield.
The i*t stock tax matches the income tax on cv-bond portfolios of equal value. The Treasury, too, could match its income (in bond sales) to the rate t tax on the full stock market return (while not tempting price manipulation). It can vary i to keep the bond volume at a fraction t of market capitalization; then share auctions supply bond interest. And companies and investors, too, could unilaterally match their burden to such tax by keeping a fraction t of capital in bonds.
The system's main feature is that nothing companies and investors do can change their tax (fraction i*t 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.