Re: tax on capital

["John O'Donnell" <jackodonnell@xxxxxxx>]

James R. Olson, jr. wrote:
> At 01:30 PM 6/1/03 -0700, John O'Donnell wrote:
> > The tax is progressively proportional to the value of the corporation and
> > independent from the rate of production. It must be paid regardless of how
> > much is produced and therefore unit [i.e. -- marginal] cost of production
> > can be reduced by producing more which implies that prices will be lowered
> > to increase demand.
> >   
>
> OK, got it.  It's essentially a fixed cost of production, since it doesn't
> change with the volume of production, and since it's based on capital value
> of the production facility, it would tend to favor those methods that are
> less capital intensive per unit.  That would favor labor intensive methods,
> good for employment.
Yes.
> Basing it on market cap would tend to favor debt over stock, since debt can
> be paid down, whereas market cap will (in general) rise with the success of
> the company.
No, debt would require payment of the tax over and above the interest payment
thereby reducing demand for debt and thus lowering interest rates and encouraging
equity investment. This differs from the present U.S. tax system that favors
debt over equity by taxing returns to equity twice [i.e. double taxation
of dividends] and returns to debt only once.

But, yes, market value will, in general, rise with company success increasing
both tax revenue and capital increase to investors.

As a side effect, because the tax increases with increases in market value
and vice versa, the tax provides a countervailing force to both "irrational
exuberance" and "irrational pessimism" as the tax increase/decrease will
decrease/increase the real value of the company thereby attenuating the effect
of irrational behavior.
>   It would also tend to be a disncentive on renovation and
> upgrading, since facilities that have completely depreciated would be tax
> free.
Again, no. Depreciation is both an accounting device and real decay of asset
value. Market value is market value as represented by the sum of the equity
and debt, not an accounting of the cost of the capacity less accounting depreciation.
Investment is encouraged because of the advantage of economies of scale made
possible by the increase in production volume induced by price reductions
encouraged by the increase in fixed costs of production. One would expect
as a result of this system that the capacity utilization rate would tend
to be above 100% [i.e. -- testing market demand by overworking capacity before
investing in economy of scale production capacity] as opposed to the present
tendency for capacity utilization to range significantly under 100% there
by fully utilizing productive capacity rather than typically wasting 15%
or more of capital investment.

Another advantage in the system is the availability of feedback signals [Described
more fully in _Three Steps to Economic Freedom_ at: http://www.geocities.com/CapitolHill/1067/c00r4.html
] that are used to determine the rate of the tax. That is, the tax rate is
increased/decreased based on the effect changes in the rate have on the tautologically
identical growth rate of the tax-revenue/corporate-market-value thereby ultimately
finding the optimum growth rate of tax-revenue/corporate-value for existing
economic conditions.
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--
			-- jbod

		Tax Privilege, Not People
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