Taxes, Loans, and Inflation: How the Nation's Wealth Becomes Misallocated

Taxes, Loans, and Inflation: How the Nation's Wealth Becomes Misallocated

Taxes, Loans, and Inflation: How the Nation's Wealth Becomes Misallocated

Taxes, Loans, and Inflation: How the Nation's Wealth Becomes Misallocated

Synopsis

Income from capital receives uneven treatment in both the tax system and the loan markets. This affects almost every investment decision make by the individuals, business, and government and causes major disruptions in the economy. In this book C. Eugene Steuerle shows how the misallocation of capital results from the interaction of tax laws, the operation of the market for loanable funds, and inflation. He first analyzes the taxation of capital income, focusing on the distortions caused by tax arbitrage and on inflation-induced discriminations among both taxpayer and borrowers. The author then applies this analysis to several related issues. He concludes with a reform agenda that calls for the adoption of a broader-based, flatter-rate income tax.

Excerpt

A major source of distortions in the modern U.S. economy is the uneven treatment of income from capital in both the tax system and the loan markets. This unevenness affects virtually every investment decision. Despite the pervasiveness of the problem, seldom are its threads woven into a single story either in the popular press or in the professional literature.

In this book, C. Eugene Steuerle provides a comprehensive analysis of the taxation of capital income at both the personal and the corporate levels. He closely examines tax arbitrage--essentially borrowing to buy tax-preferred assets. He shows that inflation plays an important part not only in creating disparities in the taxation of different types of income, but also in allocating loans among different households and businesses. New businesses and newly formed households are placed at severe competitive disadvantages in this type of environment.

The uneven treatment of capital income also explains some of the long-term limitations of monetary and fiscal policy; the failure of investment and saving incentives; organizational and financial arrangements involving mergers, leases, acquisitions, and divestitures among firms; and the nonprogressivity of the individual income tax with respect to capital income. This uneven treatment leads to prescriptions as seemingly diverse as comprehensive income taxes, expenditure taxes, flat- rate taxes, a return to the gold standard, and credit reallocation. After explaining the rationale behind each of these approaches, the author concludes that a broad-based, low-rate income tax represents the best of the alternatives.

Steuerle wrote this book while he was a federal executive fellow at Brookings. He currently serves as deputy director (domestic taxation), Office of Tax Analysis, Department of the Treasury, and economic staff coordinator of the Treasury Department's Project for Fundamental Tax Reform. Parts of the discussions in chapters 2, 4, and 9 were first published in the Public Finance Quarterly, the Wayne Law Review, the National Tax Journal, and The Brookings Review.

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