Tax reform for a fairer, more vibrant economy

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

Abstract

The paper reviews the recent literature on tax reform, and recommends abolishing the profits tax and treating personal incomes from all sources as taxable, including capital gains and dividends. Abolition of the profits tax will vastly improve the investment environment and eliminate wasteful distortions. We also offer an intermediate “gradualist” approach involving halving the profit tax rate and taxing half of dividends and capital gains. We augmented a model proposed by Chetty and Saez to incorporate the effects of manager effort for investment and showed the strong adverse effect of the profit tax on investment. Given that successive increments in total personal incomes from all sources are typically characterized by increasing intensity in economic rent, a progressive tax structure with high marginal tax rates at the top and wide tax bands is not only more equitable, but can be justified on efficiency grounds.
Original languageEnglish
Pages (from-to)881-893
Number of pages13
JournalModern Economy
Volume7
Issue number8
DOIs
Publication statusPublished - 1 Jul 2016

Fingerprint

Tax
Profit
Tax reform
Personal income
Dividends
Capital gains
Progressive taxes
Economic rent
Marginal tax rate
Tax rate
Managers
Tax structure

Keywords

  • Economic Rent
  • Efficiency
  • Progressivity
  • Rent Intensity
  • Tax Reform

Cite this

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title = "Tax reform for a fairer, more vibrant economy",
abstract = "The paper reviews the recent literature on tax reform, and recommends abolishing the profits tax and treating personal incomes from all sources as taxable, including capital gains and dividends. Abolition of the profits tax will vastly improve the investment environment and eliminate wasteful distortions. We also offer an intermediate “gradualist” approach involving halving the profit tax rate and taxing half of dividends and capital gains. We augmented a model proposed by Chetty and Saez to incorporate the effects of manager effort for investment and showed the strong adverse effect of the profit tax on investment. Given that successive increments in total personal incomes from all sources are typically characterized by increasing intensity in economic rent, a progressive tax structure with high marginal tax rates at the top and wide tax bands is not only more equitable, but can be justified on efficiency grounds.",
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author = "HO, {Lok Sang} and Tianle ZHANG",
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Tax reform for a fairer, more vibrant economy. / HO, Lok Sang; ZHANG, Tianle.

In: Modern Economy, Vol. 7, No. 8, 01.07.2016, p. 881-893.

Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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AB - The paper reviews the recent literature on tax reform, and recommends abolishing the profits tax and treating personal incomes from all sources as taxable, including capital gains and dividends. Abolition of the profits tax will vastly improve the investment environment and eliminate wasteful distortions. We also offer an intermediate “gradualist” approach involving halving the profit tax rate and taxing half of dividends and capital gains. We augmented a model proposed by Chetty and Saez to incorporate the effects of manager effort for investment and showed the strong adverse effect of the profit tax on investment. Given that successive increments in total personal incomes from all sources are typically characterized by increasing intensity in economic rent, a progressive tax structure with high marginal tax rates at the top and wide tax bands is not only more equitable, but can be justified on efficiency grounds.

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