Emmanuel Saez on Tax Loopholes - Dictionary of Arguments
Saez I 138
Tax Loopholes/Saez/Zucman: Taxing people with the same income at the same rate is the concrete application of calls to “plug loopholes.” It has several implications.
1) First, it means that every income source should be subject to the progressive individual income tax: not only wages, dividends, interest, rents, and business profits, but also capital gains, which in many countries (including France and the United States) are currently taxed at lower, flat rates.(1)
Vs: The frequent objection that capital gains taxes impose unfairly hefty tax bills when businesses are sold (because capital gains are a one-time windfall) can be addressed by spreading payments out, as is routinely done in the context of estate taxation.
Saez I 139
2) A second application of the “equal income means equal tax” principle: the corporate and individual income taxes should be integrated - like European countries used to do and countries such as Australia and Canada, among others, still do.
Saez I 140
a) Such a system recognizes the basic truth that the corporate income tax is only a prepayment for the individual income tax. It has many advantages. To start with, it dramatically reduces the incentives for firms to dodge corporate taxes.
b) Another advantage of an integrated system is that it removes distortions. For instance, it becomes neutral for a business to be incorporated (subject to the corporate tax) or not (with all its profits passed to its owners and subject to individual income taxes, like partnerships in the United States).
Saez I 141
3) There is a third implication of the “equal income means equal tax” principle. A major advantage of an integrated corporate tax is that a dollar of wage would always be taxed the same as a dollar of distributed profit. While it would be a
Saez I 142
step in the right direction, integrated taxation would still leave a thorny issue unaddressed: retained earnings—profits made by companies but not distributed as dividends—would still be taxed less than other income sources.
A business that is not publicly listed should always be treated as a partnership: free from corporate tax, but with all its profits subject to the progressive individual income tax of its owners. The US experience shows that it is technically feasible to tax closely held companies at the shareholder level.(2)
This rule would make it impossible for the wealthy to reinvest their income tax-free, one of the most potent sources of tax injustice today. I
Shell companies: t would also destroy the shell company business that has ballooned since the 1980s, since shell companies would stop conferring any tax advantage to their creators. Shell corporations, it goes without saying, are not corporations. Recognizing them as corporations for tax purposes - with the associated tax benefits - is absurd and must stop.
1. In current US law, when assets are transferred to heirs, their purchase price is re-set to the price prevailing at the time of the transfer. This infamous loophole, known as stepped-up basis, means that people can avoid capital gains taxes by holding on to their assets until death. Most economists agree that this is a critical loophole to close.
2. Profits accruing to nonindividual shareholders (such as pension plans and foundations) would remain subject to the corporate tax. Realized capital gains would be subject to the progressive income tax, but this does not imply that these capital gains would be taxed twice, for the following reason. In the integrated system that we describe, retained earnings would be considered as new investment from shareholders and hence factored in the shareholder stock basis (as for S corporations in the United States today). As a result, capital gains would not reflect retained earnings but would only reflect pure asset price appreciation._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.