Mark Gergen (UC-Berkeley) presents How to Tax Global Capital, 69 Tax L. Rev. ___ (2016), at NYU today as part of its Tax Policy Colloquium Series hosted by Daniel Shaviro and Rosanne Altshuler:
In an earlier paper I proposed a new approach to taxing capital owned by U.S. households and nonprofits. The heart of the new approach is a flat annual tax on the market value of publicly traded securities with a rate of around .8 percent (80 basis points) that is remitted by the issuer. A security issuer gets a credit for publicly traded securities it holds so that wealth that is represented by a string of publicly traded securities is taxed once. For example, a mutual fund remits the tax based on the market or redemption value of interests in the fund and gets a credit based on the market value of publicly traded securities it holds.
Income producing capital that is not subject to the securities tax, such as an interest in a closely held business or in a private equity fund, is covered by a complementary tax with the same rate as the securities tax.
The complementary tax is paid on the estimated value of an asset. Asset value is estimated assuming all investments yield a normal return. An entity like a private equity fund is required to remit the tax on the estimated value of all interests in the entity that are held by any persons subject to the complementary tax, which include individuals, family trusts, nonprofits, and defined benefit pension funds. Importantly, an entity is required to revalue all interests of a type if any interest of a type is redeemed or sold in an arm's-length exchange. The revaluation rule brings the expected tax burden of the securities tax and the complementary tax into line for assets like interests in hedge funds that are fairly liquid and so are likely to be revalued periodically. I estimate the securities tax will cover around 80 percent of the income-producing wealth of U.S. households and nonprofits. The complementary tax will cover the rest.
The securities tax and the complementary tax are intended to replace the entire existing patchwork system for taxing capital income. This includes the corporate income tax; the individual income tax on all income from securities, including interest, dividends, and capital gains; and the individual income tax on all other investment or business income, including income from partnerships and sole proprietorships and income from real estate. The taxes are designed to work alongside a tax on labor income. Ideally this would be in the form of a cash-flow consumption tax or a value added tax, because these forms of a labor income tax largely eliminate the need to distinguish labor income and capital income, unlike a wage tax.
This paper addresses the treatment of cross-border investment under the two taxes in the existing international tax regime. Any tax on capital will distort savings choices and labor-leisure choices by making deferred consumption more expensive than current consumption. The goal in designing a tax on capital is to minimize other distortions. These include distortions in how capital is used, in the financial structure of business enterprises that use capital, in how capital is intermediated, and in the portfolio choices of wealth holders. The existing U.S. system for taxing capital income performs miserably in many of these respects. The securities tax and the complementary tax eliminate many of the distortionary features of the existing U.S. system for taxing capital income, including the realization requirement, the distinction between debt and equity, and the doubletaxation of corporate income.