Optimal rate of tax on capital is zero

From https://www.aeaweb.org/articles?id=10.1257/jep.23.4.147


Nice explanation


The new corporate tax landscape

Randall Kroszner’s advice for the next president

The effects of cutting the Australian company tax by one percentage point


Source: The incidence of company tax in Australia | The Treasury.

@PikettyLeMonde pension fund socialism has finished taking over #capitalism #Piketty

Peter Drucker first pointed out in the 70s that the retirement savings of ordinary workers will end up opening the majority of public listed companies. That day has come much to the disappointment of the Leftover Left ranging from Thomas Piketty to Max Rashbrooke.image 

Source: CONVERSABLE ECONOMIST: US Corporate Stock: The Transition in Who Owns It.

Any call for higher taxes on investment incomes and capital and even tax havens is an attack on the retirement savings of ordinary workers.

Why is GST but not company tax incidence so easy to understand

image The tax incidence of sales taxes is understood by everybody but who pays company tax is stubbornly misunderstood. The seller is sending the tax cheque to the taxman does not fool anyone regarding who ultimately pays sales taxes.

Everyone expects that sales tax increases such as of the GST or VAT will be passed on to buyers but sometimes a little bit is absorbed in terms of lower profits by sellers if it is more than the market can bear.

When it comes to company taxes, this intuitive understanding of the economics of the incidence of taxes completely disappears. There is a strong belief that only investors pay the company tax in the form of dividends.

The notion that investors may reduce their investment and therefore the amount of capital with which workers can work is stoutly denied as is the implications for lower than otherwise wages because of this.

The possibility that the entire company tax may show up as lower wages when capital is internationally mobile is just not even contemplated. This is despite foreign direct investment being welcomed on the grounds that more capital means higher wages for local workers.

Likewise, when a factory is re-located offshore, it is understood that that will harm wages. That understanding does not carry through to company tax incidence when the factory relocates offshore because of low company taxes rather than import competition.

@garethmorgannz gives optimal tax theory a pass once again @JordNZ


Source: Mankiw, N. Gregory, Matthew Weinzierl and Danny Yagan. 2009. "Optimal Taxation in Theory and Practice." Journal of Economic Perspectives, 23(4):147-74.

The Morgan Foundation gave optimal tax theory a pass in yesterday’s publication about taxes on land and capital. Gareth Morgan is keen on a comprehensive capital tax.


Source: Taxing Wealth & Property – What Works? A Morgan Foundation Report.

This failure to refer to optimal tax theory is despite the Foundation’s strong commitment to evidence-based policy. Any discussion of tax policy that is evidence-based must refer optimal tax theory.


Source:  Morgan Foundation, Public Policy Education.


No two tax cuts impact the economy in the same way.

Tax mix in the USA as a percentage of GDP since 1965

The only major change in the US tax mix in the last 50 years has been greater reliance on social security contributions.


Source: OECD Stat.

The share going to income taxes bobbing up and down quite a lot in the last 30 years much of that to do with the business cycle. In the 1990s, the share of taxes from personal income increased during boom times. In the Great Recession, the tax share to income tax rose with the declining economy as did that on corporate profits.

New Zealand’s Experience with Territorial Taxation | Tax Foundation

New Zealand is one of only two developed countries, the other being Finland, that switched from a territorial tax system to a worldwide system.Both eventually returned to a territorial tax system for competitiveness reasons. New Zealand went one step further in their experiment with worldwide taxation by ending deferral.

This resulted in a twenty year stagnation in foreign investment at a time when foreign investment was growing dramatically in the rest of the developed world.

This coincided with an economic decline in New Zealand relative to Australia and the rest of the developed world. Because foreign investment is key to accessing the world’s consumers, it is not surprising that less foreign investment translated to less economic prosperity at home.

The New Zealand experience shows that ending or limiting deferral in the United States, as President Obama and others have proposed, would likely have severe economic downsides. Instead, as New Zealand eventually did in 2009, the U.S. should implement a territorial system that exempts foreign earnings.

via New Zealand’s Experience with Territorial Taxation | Tax Foundation.

Australia is number 9 in taxing investment income – corrected

Corporate income tax

via We’re number 2 in taxing investment income. But apparently that’s not good enough » AEI | Economics Blog » AEIdeas.

John Rawls and are the super-rich unjustly over-taxed?

John Rawls is often put forward by political progressives as the starting point for political philosophy. Rawls pointed out that behind the veil of ignorance, people will agree to inequality as long as it is to everyone’s advantage.

Rawls was attuned to the importance of incentives in a just and prosperous society. If unequal incomes are allowed, this might turn out to be to the advantage of everyone.

Rawls lent qualified support to the idea of a flat-rate consumption tax (see A Theory of Justice, pp. 278-79). He said that:

A proportional expenditure tax may be part of the best scheme [and that adding such tax] can contain all the usual exemptions.

The reason why Rawls lent qualified support to the idea of a flat-rate consumption tax was because these taxes:

impose a levy according to how much a person takes out of the common store of goods and not according to how much he contributes.

A simple way to have a progressive consumption tax is to exempt all savings from taxation. Taxable consumption is calculated as income minus savings minus a large standard deduction. Different countries use different terms to describe the minimum amount that must be earned before any taxes are paid.

Income tax must be opposed on social justice grounds, but not progressive consumption taxes.

Given that the super-rich – the top 0.1% of income earners – do not spend much of their incomes, especially on the way up building their businesses, they could be rather over-taxed!

Steven Kaplan and Joshua Rauh’s “It’s the Market: The Broad-Based Rise in the Return to Top Talent”, Journal of Economic Perspectives (2013) found that:

  • Rising inequality is due to technical changes that allow highly talented individuals or “superstars” to manage or perform on a much larger scale.
  • These superstars can now apply their talents to greater pools of resources and reach larger numbers of people and markets at home and abroad. They thus became more productive, and higher paid.
  • Those in the Forbes 400 richest are less likely to have inherited their wealth or have grown up wealthy.
  • Today’s rich are working rich who accessed education in their youth and then applied their natural talents and acquired skills to the most scalable industries such as ICT, finance, entertainment, sport and mass retailing.
  • The U.S. evidence on income and wealth shares for the top 1% is most consistent with a “superstar” explanation. This evidence is less consistent with the gains in earnings of the top 1% coming from greater managerial power over the determination of their own pay in the corporate world, or changes in social norms about what managers could earn.

Today’s super-rich are highly productive because they produce new and better products and services that people want and are willing to pay for. These rewards for entrepreneurship and hard work guide people of different talents and skills into the occupations and industries where their talents are valued the most. The efficient allocation of talent and income maximising occupational choices were important to Rawls’ framework.

Another important role for incentives is it rewards entrepreneurial alertness. People will look for and take advantage of hitherto unnoticed business opportunities if they are rewarded for doing so. These private rewards for greater effort, excellence and superior alertness are the driving force of the market. Most of the innovation that drives modern prosperity would not have occurred but for the lure of profit.

Rawls was keen on stiff inheritance taxes to prevent the “large-scale private concentrations of capital from coming to have a dominant role in economic and political life”. His support for inheritance taxes was out of concern with a concentration of political power rather than improving incentives.

Rawls overrated the power of the rich to buy political influence as do many on the Left. They do not understand Director’s law of public expenditure and the theories of the median voter and the expressive voter. The major political parties all chase the swinging voter in the middle class.

Rawls’ views on incomes taxes and the rich are rather under-discussed among his champions on the progressive Left. Google John Rawls and income taxes and you do not get many hits or papers of any substance.

With his emphasis on fair distribution of income, Rawls’ initial appeal was to the Left, but left-wing thinkers started to dislike his acceptance of capitalism and tolerance of large discrepancies in income. Many moved on. Rawls excluded envy from deliberations behind the veil of ignorance. This may be why he lost some of his initial appeal to some.

You must admire his consistency. Rawls was happy for people to be super-rich as long as they saved and invested their resources. Everyone in society gains from those investments and is better off.

Robert Lucas (1990) estimated that a revenue neutral elimination of all taxes on income from capital and on capital gains would increase the U.S. capital stock by about 35% and consumption by 7%. Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, and Laurence J. Kotlikoff (2014) found that eliminating the corporate income tax would raise the U.S capital stock (machines and buildings) by 23%, output by 8% and the real wages of unskilled and skilled workers by 12%. Is taxing the rich worth this large a lost wage rise?

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