Optimal rate of tax on capital is zero

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

Lucas on optimal capital taxes

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No income tax to cut anymore until household incomes in the six figures!

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Source: Most People Don’t Pay Much in Federal Income Tax | Mother Jones

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The wage bump from 1% Oz company tax cut @TheAusInstitute @GrattanInst @JordNZ

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How wasteful is the Oz company tax? @TheAusInstitute @GrattanInst

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Source: The incidence of company tax in Australia, Xavier Rimmer, Jazmine Smith and Sebastian Wende, Australian Treasury working paper.

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Morgan’s capital tax forgot 30% retirees move every 5 years @TaxpayersUnion

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With 30% of retirees changing address every 5 years, they will have to downsize into hovels because they have to pay IRD the great big new tax on their capital championed by Morgan and his Opportunities Party well before they die.

retirees at same residence 5 years ago

Morgan’s 1.8% tax on equity capital is not an inheritance tax for the majority of retirees. It is a nest egg tax as they downsize after the kids fly the nest, grandchildren appear or they move to a more convenient place as they become frail.

Because they will have to pay back taxes of tens of thousands of dollars to IRD every time they sell their house, retirees either will not be able to move closer to family because of grand-children or health issues or they will have difficulty moving into a retirement home of their choice.

This is the first in a series of blogs showing how the Opportunities Party is too clever by half in its manifesto development. By insisting on having different policies to everybody else by a good country mile, it ends up having to take up the policies others rejected because they do not work.

In the case at hand, they put an inheritance tax on ordinary New Zealanders at the same rate as the rich including the founder of the Opportunities Party. This tax will be the only capital tax anywhere that is not progressive.

Over 70% of the retired own their own house mortgage free. The majority of that equity will now go to IRD plus interest by the time both members of the couple die given the average capital tax will be about $10,000 per year in Wellington and twice that in Auckland. They face up to 20 to 25 years of deferred capital taxation that will take half the value of their house easily. It will be hardest if they must cash-out their house to go into retirement home.

The purpose of buying a house is to have a nest egg for retirement. You may draw down that capital because of health issues or pass it on to children if you are luckier than that.

Morgan wants to radically change the way in which retirees go into the evening of their days. People who just managed to save for a house will have nothing to pass on to their children. No more bank of mum and dad either.

@garethmorgannz is getting a little techie about debating optimal tax theory

All I said was “optimal tax theory including that pioneered by Stiglitz and Merrlees, economists of impeccable left-wing credentials, show that taxes on the income from capital should be low because the deadweight social costs of taxes on capital are very high”.

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Combined federal, state and local company tax rates across the OECD, 2015

Britain will have the 2nd lowest company tax rate across the OECD by 2020. The 2016 British budget announced overnight reduces the tax to 17% by 2020.

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Source: OECD Stat  Table II.1. Corporate income tax rate.

Why @garethmorgannz wants his great big new tax @geoffsimmonz

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Source: Poll Results | IGM Forum.

UK has the lowest company tax rate in the G20

The Rahn curve explained

Who is where on the Laffer curve?

The Nordics use optimal tax theory to fund their welfare states

Efficient taxes gather more revenue and therefore are capable of funding a larger public sector with less political resistance from groups who are net taxpayers. The so-called neoliberal reforms of the 1980s and 1990s actually saved the welfare state by putting it on a revenue raising structure that provoked less political resistance.

A switch to more efficient taxes through tax reforms allows governments to raise the same amount or larger amount of revenue for the same level of political resistance from taxpayers. This is because less revenue and output is wasted by discouraging labour supply, investment, savings and investment in capital with high marginal rates of tax on narrower tax basis. Everyone gains from converging on more efficient modes redistribution.

The Nordic countries have been on to this application of optimal tax theory to expanding the size of government and the welfare state for a long time. The Nordics have high but flat taxes on labour income, low taxes on business income and a high, broad-based consumption tax be it called a VAT or GST as illustrated by a just published Tax Foundation report.

To begin with, the USA has a smaller government because it relies more income taxes than on consumption taxes.

Governments in Europe switched towards consumption taxes such as the VAT or GST because this allowed them to raise a large amount of revenue with broad-based taxes at low rates. A VAT or GST exempts exports and business to business transactions from taxes so that reduced taxpayer resistance.

Scandinavian income taxes raise much more revenue than in the USA because they are rather flat. That is, they tax most people at these high rates, not just high-income taxpayers. The top tax rate in the Scandinavian countries cuts in at about one and a half times average income or less rather than eight times average income as in the USA.

The marginal income tax rates including this top income tax rate cuts in a low level of income is also rather high in the Nordic countries relative to the USA’s top income tax rate with the exception of Norway.

Nonetheless the Nordic countries are alert to not killing the goose that laid the golden egg. Company taxes are relatively low in Scandinavian countries as compared to the USA so that businesses do not flee to other jurisdictions.

Top marginal tax rates on dividends and capital gains are not above-average in the Nordic states but their taxes on less mobile tax bases such as from labour and consumption are much higher.

A large welfare state such as those in the Nordic countries require a significant amount of revenue, so the tax base in these countries must be broad. This  also means higher taxes on consumption through the VAT or GST and higher taxes on middle-income taxpayers.

Business taxes are a less reliable source of revenue because of capital flight and disincentives to invest. Thus, the Nordics do not place above-average tax burdens on capital income and focus taxation on labour and consumption.

via Sources of Government Revenue across the OECD, 2015 | Tax Foundation and How Scandinavian Countries Pay for Their Government Spending | Tax Foundation.

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