Friday, August 13, 2010

The right of taxation vs the right of ownership

Governments hold the right to tax you.  Although most people would find the alternative distasteful, Government's holding a percentage ownership over you is actually a weaker right than the power to tax you.  A Government's passive right to a percentage of dividends you pay yourself is equivalent to the passive rights of a minority shareholder.  Under Modigliani–Miller theory, the government should be passive between the 2 choices.  A company that reinvests what it would otherwise pay in taxes, theoretically grows its accumulated profits more, and so has more funds available to pay investors and government when it pays.  The theoretical time adjusted return to government is identical for a 30% tax rate and a 30% ownership rate.

From the enterprise's point of view, it offers no real new tax avoidance opportunities.  It just greatly simplifies actions.  Instead of depreciating assets over their lives, enterprises simply use the natural cash based effects of their actions, and massively complex accounting rules designed to determine yearly tax obligations are no longer necessary to satisfy government obligations.

From an individual point of view, a government partial ownership would be almost equivalent to a progressive consumption tax:  Simply make all investment tax deductible, but raise progressive tax rates substantially.

The right of taxation vs the right of ownership is roughly comparable to the right of demanding specific regular dividends vs the passive right to claim a proportional amount of dividends when the tax payer decides to pay himself.

Under natural finance, the ideal tax regimes would be to tax salaries, benefits, bonuses, capital gains and dividends a flat 10%, while not taxing interest income.  There would be a progressive tax on total consumption, with a rebate of the 10% (salary/capital) tax for those consuming under, say, $20k/yr.  The reason for not taxing interest income under natural finance is that it is determined by perfect markets, and non discretionary:  If you are earning more interest than you deserve, someone will buy your loan away from you.  All other benefits and compensation are discretionary agreements.  Corporate taxes would be replaced with passive ownership benefits.

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