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.
- 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 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 i*t 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)i*t
shares, and tax-free divestment matches the original yield.
The Treasury could match its bond sale income 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 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 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 does now.
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