What if capital gains on corporate securities were not taxed at all, or at a very minimal level (10% or less) as long as the money invested went to the company?
At the same time, secondary purchases and sales would be subject to ordinary income tax rates. To be clear about it, buying stock in the market from a prior shareholder, investing via derivatives like total return swaps or over the counter options, or any of a number of other ways people invest would revert to ordinary income. This would apply to bonds, as well, though the amount of income the bond world offers as capital gains is pretty limited.
This would definitely steer more money toward the genuine needs of companies to raise capital, while removing the temptation to waste money and time avoiding income tax by “converting” ordinary income into capital gains.
Just a thought on a way to increase real investment in our private economy, which should help create employment opportunities, while simultaneously cutting back on the incentive to strip companies of their assets and fire American workers through the mechanism of buying and breaking up companies.
I would love to hear what my readers think. Their comments after the break.
hh
Readers get their say:
Mind on Money 
Great idea!
May be we all need to communicate it to the various senators and Prez.
Well we will most probably end up with some sort of tax shifting schemes via shell companies and/or share dilution. There will be loopholes. After n years they will be patches and then again and again and we will end up with another spaghetti ball of rules and exceptions. The status of the wasted time and money >> unknown.
On the same note: why do we tax earned income more than portfolio income? If we want to tax IPOs less why not tax “initially and genuinely earned income“ less than capital gains.
There was a time in the past when capital gains were taxed as income. Turnover was much lower, because the gains are only taxed when realized. That time in our economic history was marked by growth of national wealth, a steady rise in median income, and a drop in poverty. Did you check out my little fable called Death by Tax Cuts last June?
link:https://mindonmoney.wordpress.com/2010/06/12/death-by-tax-cuts/
Thanks for the link. The story reminds me of Wall Street – the movie.
As a starting point, it is rather bizarre that interest payments on temporary debt capital are tax deductible to the corporation while dividend payments on permanent preferred capital and common stock capital are not deductible. This tax-world reality creates a tax-perverse incentive to use callable, temporary, variable-rate debt rather than permanent equity.
Debt and equity are both investment capital. Why punish the more stable of the two with harsher taxation?
too rational. it would work. where would all that brain power go that created all the complex instruments that deferred taxes. Maybe they would become creators of something of real value that made the world a better place to live in….nahhhhhh i must be writing while dreaming, it’s late after all….
HH,
There are a lot of good ideas out there, but they still don’t deal with the fact that once governments begin to tinker, they mess up and the unintended consequences are severe. We need to cripple the governments ability to tinker. Do a flat tax, consumption tax or VAT exclusively, with no deductions – even the precious mortgage. Rebate most of the tax paid back to people below certain income levels (but not all of it – everybody needs skin in the tax game). When governments target certain outcomes with tax policy, it leads to things like an 80,000 page tax code that crushes growth and innovation.
Bruce —
I understand the yearning for simplicity, but I disagree with the fundamental premise behind it, that of spreading the burden irrespective of the amount of the benefits accruing to each.
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For the first 100 years of our Republic, most governmental functions were paid for by excise taxes, tariffs and the like. When you think about it, most of the things the government did had a direct benefit for commerce, often very specific industries. Even the wider benefits like roads, postal service, military, firefighting, police and courts tended to provide protection of private use of the common green, and provide more benefit to the property owners. No surprise, given the fact that our Republic initially gave the vote to only 39,000 male property owners out of 4 million inhabitants.
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As far as possible, I think we should tax commercial activities directly for the governmental services that benefit those activities. The clearest example is the billions and billions we take from general revenues to pay for the FAA and airports. People and freight that fly should pay for that. To the extent there is a benefit for people who don’t fly or don’t get air-freight, those who do will raise their prices to offset the additional overhead. That’s just fine with me. If it doesn’t make economic sense for them to be flying themselves or their freight, they’ll live with lower profit or lower net income, or they’ll find a way to move without using the FAA. Our system of paying for roads with fuel tax is about as “clean” a way to do it as I can think of.
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Similarly, an import duty on oil that pays for the Navy’s protection of the sea lanes makes sense. Domestic energy should have an economic advantage over imported energy. And so on.
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The Social Security system, after the Reagan increase in the tax, began to operate as a true insurance system, with actuarial life out past 2050. So far I don’t see one person who talks about private accounts that become part of a deceased person’s estate addressing the reality that the deduction from pay would have to double because the people who actuarially pay in but don’t collect benefits would be gone from the pool, meaning each person would have to save twice as much to pay for the lack of that insurance benefit. Check out my post Thank You for Smoking to see a somewhat humorous example of how it really works, and how far out in fantasy land the “fiscal responsibility” reformers truly are. If they just did the basic arithmetic before opening their mouths with policy statements, we’d be a lot more likely to address our fiscal problems.
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I’m sure there will be more later…
hh
HH,
Your ideas are often good and logical. However, they assume that the government that has given us the current mess (which probably can’t be fixed without an implosion forcing the issue) is capable of reforming itself, getting things right and not engaging in damaging crony capitalism. This is the same government that thought it was OK to mix the social security (which as you point out was actuarially sound) tax revenue with general revenues. Now these revenues are gone and have been replaced with worthless IOUs from a broke government.
You make a good point about users paying for airports and highways.
You will continue to come up with some good ideas that are not practical, because government is unable to do anything efficiently. As I’m sure you get tired of hearing me say, it’s the unintended consequences (when they are truly unintended) that can’t be kept in check with a micromanaging government.
You could also do away with ALL coercive taxation. Then government would have to ask nicely, and say “please” and “thank you” and they might even make some effort toward doing something worthwhile. Capital campaigns and fundraising would be used to fund more expensive projects, like aircraft carriers. We might have to name one “USS Bill Gates” instead of after a dead president. M1 tanks could sport subdued Pepsi logos.
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And all the really STUPID and wasteful things that government does would end nearly overnight, because no one in their right mind would pay for them if they were actually given a CHOICE.
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Would some things go undone that need to be done? Sure. But they do now. Would some people enjoy benefits tha they did NOT pay for? Sure. But they do now. I consider these FAR lesser evils than being a slave for nearly half of my working life to pay people who I wouldn’t trust to walk my dog, let alone run the country.
One way or another, the end user pays.
Why not toss out the entire tax code (oh, the rich lose taxloopholes)
and let a truly free market (oops, the rich lose out again)….
forget it, nothing changes without the blessing from on high.
Slavery is good, enjoy it while you can.