q-fin updates on arXiv.org
Tue, 04 Feb 2020 12:02:08 GMT language
The greatest harm from highway robbers lies not in seized wallets but in
inhibited travel. Similarly, incentives for tax-reducing strategies put much
sand in the wheels of the economy. Demands to replace our monumental tax code
with a simple, graceful one that does not distort economic incentives heat up
periodically in political debate, but such dreams never materialize. A
FUNDAMENTAL obstacle, not yet well understood in the economic literature, is
the impossibility of objectively evaluating the tax base -- assets, income,
etc. One can see this even in toy examples, say, trying to assess the value of
a position in chess: great masters' assessments will all differ. Here computer
theory can add an insight not provided by classical economics tools.
A way around is to avoid evaluations by expressing the tax in natural units,
not in cash. For publicly traded corporations, these could be corporate shares.
I discuss a simple (postcard-sized in ALL details) corporate tax system that
avoids ANY distortion of incentives. (Tax tools MEANT to influence corporate
policies should be set as explicit separate taxes or credits, open to public
scrutiny, not hidden between lines of an incomprehensible tax code.) Roughly,
the~system is to periodically take a t*i fraction of shares to auction, where t
is the tax rate, i is the interest rate. It replaces all income taxes on
publicly traded corporations, their subsidiaries, and shareholders.
The interest rate is defined via specially designed bonds, so that the whole
system can be shown PRECISELY equivalent to a flat tax on INVESTMENT RETURN.
Note that taxing the return DIRECTLY is impossible: it would invite
manipulation of stock market~prices. The main feature is that nothing
corporations and investors do can change their tax (t*i fraction of shares), so
they would do business exactly the SAME WAY they would WITHOUT TAXES.