Do We (Now) Collect Any Revenue From Taxing Capital Income.docVIP

DO WE NOW COLLECT ANY REVENUE FROM TAXING CAPITAL INCOME? Roger Gordon University of California, San Diego Laura Kalambokidis University of Minnesota, Twin Cities Joel Slemrod University of Michigan, Ann Arbor November 4, 2002 Presented at the International Seminar in Public Economics conference held at the University of California at Berkeley on December 7 and 8, 2001. We are grateful to Heidi Shierholz and Steffanie Guess-Murphy for outstanding research assistance. Abstract: The U.S. income tax system has long been recognized as a hybrid of an income and consumption tax, with elements that do not fit naturally into either pure system. What it actually is has important policy implications for, among other things, understanding the impact of moving closer to a pure consumption tax regime. In this paper, we examine the nature of the U.S. income tax system by calculating the revenue and distributional implications of switching from the current system to one form of consumption tax, a modified cash flow tax. Do We Now Collect any Revenue from Taxing Capital Income? Roger Gordon, Laura Kalambokidis, and Joel Slemrod Introduction The tax treatment of capital income is one of the most contentious aspects of existing tax systems, both in theory and in practice. Most existing income taxes strongly reflect the structure recommended by Haig (1921) and Simons (1938), who advocated that individuals be taxed on their combined wage and capital income, subject to a perhaps progressive rate structure. The Haig-Simons structure came to be known as a Comprehensive Income Tax. Yet in most countries, an increasing fraction of revenue over time has been collected through value-added taxes and payroll taxes, both of which exempt capital income from tax. In recent years, several Scandinavian countries have also moved away from equal tax rates on wage and capital income by maintaining a progressive tax on wage income but imposing a flat tax at a relatively low rate on a pa