Thursday, September 29, 2016

"What’s the optimal tax for capital income?"

A subject near and dear to flinty hearts everywhere.
From our introduction to 2013's "Why Capital Gains Should be Taxed as Income":
Over the last few years I've come to believe that all income, earned and unearned, should be taxed at the same rate, that preferential taxation of capital no longer leads to the intended policy effects of job creation and increasing capital investment in plant. property and equipment but rather is a bought-and-paid-for scam perpetrated by the financier class.

On a related point, it's time to get rid of the carried interest loophole which taxes income at cap gains rates for private equity and hedge funds.
That carried interest should not be treated as a capital gain can be proven quite easily.
Show me one tax return where a carried interest capital loss was allowed.
[you won't be invited to any of the meetings ever again -ed]

At the lower end of the income scale there should be some minimum tax. Everyone should have some skin in the game.
I'll be coming back to all these topics throughout 2012, in the meantime here's the granddaddy of Econ papers for folks interested in this stuff, sincere thanks to the reader who turned my vague recollection of the thesis into an actual PDF copy. It is as pertinent and fresh today as the day it was written, 34 years ago....
And a different angle from Felix Salmon at Reuters last week:...
Here's the latest, from Washington Center for Equitable Growth:
How much should U.S. policymakers tax capital? It’s not a simple question. In fact, for some time there was a debate within the economics profession as to whether there should be a tax at all. A famous result from the Chamley-Judd model and other resultsled many economists to believe that the optimal tax rate on capital income was zero. The argument by these economists was that placing any tax on capital gains from investments would be incredibly distortionary and would come at a major cost to the overall efficiency of the economy. 
Recent research, however, shows that changing the (in some cases very unrealistic) assumptions underpinning these earlier models pointing to a zero optimal tax rate result in findings that there is a positive optimal tax rate on capital. A new paper might help policymakers understand this new way of thinking about taxing capital. 
The new working paper from the National Bureau of Economic Research is by University of California-Berkeley economist Emmanuel Saez and Harvard University economist Stefanie Stantcheva. In their paper, they try to do for capital taxation what economists have done for labor income taxation: build a simple model of optimal taxation. More specifically they are using a “sufficient statistics” approach, which allows them to feed a few specific parameters derived from empirical papers into a model to help get a broader understanding of the U.S. economy. 
First, the two economists build a model of the economy in which people aren’t going to live forever and don’t have perfect foresight—two obviously unrealistic assumptions in the prior models. That plus the new assumption they add to their model—that people like wealth for wealth’s sake, not just as a way to fund consumption—results in people who won’t stop saving as soon as capital is taxed. This is important as the prevailing view among economists who believe in an optimal zero tax rate is that higher tax rates result in very large changes in savings....

HT: David Keohane at FT Alphaville's Further Reading post.