> When you take into account corporate taxes, inflation, and risk the difference between tax rates on wages and cap gains aren't as big as you might think.

This doesn't make any sense. All of these things (with the exception of corporate taxes, which shouldn't exist) are priced into the return of the investment[1] and have nothing to do with taxation.

Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate?

[1] More precisely, investments with a lower return are less desirable and their price tends to drop until the return (including risk, inflation, etc) is.

> Why would you take risk into account for purposes of taxation? Should gambling income be taxed at a commensurately lower rate?

There's actually some bizarreness in the English tax code around this. Most taxpayers are subject to a 28% levy on investment returns. Gamblers themselves aren't taxed on winnings while the house pays 15% on their profits. (The treatment of professional gamblers is a conversation for your accountant.)

If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes.

> If I buy an asset that only appreciates at the rate of inflation, then I end up paying taxes on what amounts to a fake gain. Even if it appreciates faster my effective tax rate is higher than the actual number used to calculate my taxes.

The same is true of getting a raise and paying higher taxes on a "fake gain" (i.e., your effective tax rate slowly rises as each boundary shifts lower in real terms). That being said, I guess my main complaint wasn't with the inflation claim but rather with the idea that the risk/return line is somehow relevant to taxation.

What you are describing is different from what I'm talking about. You are talking about how tax rates can go up over time if the brackets are not adjusted for inflation.

What I'm talking about is the fact that you can have a nominal gain that you pay taxes on that is not a real (inflation adjusted) gain at all.

These are two different problems. The first we handle by adjusting the tax brackets every year. The second we do not handle. I suppose we could, but it would be a lot more complicated.

I really liked the discussion of the Chamley-Judd model, especially in parable form.

Question though: I worry that some individuals have the ability to recharacterize their earnings as either income or gains by shifting their contracts and methods of compensation.[0] If so, then you end up with odd results. Scenario 2 (a 50% tax on wages) turns into Scenario 1 (no taxes) for that subset of the population.

Looks like a well studied topic, so I'm sure someone tackles this?

[0] Say I build machines that make widgets, and your new widget factory wants such a machine. You could hire me as an machine-building employee, I could own my own business and you could buy the machine from me, or you could give me shares of ownership in your factory. Each of these could result in the same actions and changes in wealth for all parties, but would be taxed under completely different systems. CEO compensation packages are the most transparent real world example of compensation structuring I can think of. On the other hand, Jon Ronson interviewed a woman making 1.5-3 million per year who claimed she paid 35%, that she wasn't rich enough to restructure to avoid income taxes. This was in a piece on income inequality, maybe for GQ. So maybe this is non-trivial until you start getting near the top...

Indeed if you look at the Wikipedia link I posted you'll find a section on "Avoidance of tax arbitrage between capital and labor incomes" which is exactly the problem you describe.

Incidentally, when people talk about "tax shelters" and "complicated schemes the rich use to avoid paying taxes"(1) they're mostly talking about this. Though often they don't make that as clear as they should.

1. http://www.nytimes.com/2015/12/30/business/economy/for-the-w...

Yup, right there citing Reis (2007). Good stuff, thanks.

1) It looks like I'm mixing up the California withholding rate with the tax rate. Thanks.

2A) Granted. If I had a magical tax wand, I'd obliterate corporate taxation.

2B) It's an argument I've heard, but I'm more interested in avoiding arbitrage. My preferences might be mistaken. :)

3) If I hold the belief that we shouldn't tax income differently based on its source, Mankiw's argument doesn't have much force. His reasoning is sound, sure, but I'm not sold on the premise.

1) Yes. This is true and annoying especially if you care about short term cash flow. If you super care about this you can play games with your W4 to cut down your withholding and instead pay quarterly tax payments. Though if you screw up and underpay you'll owe penalties.

2A) Indeed I agree. Though personally I put the chance of this ever happening at precisely zero due to the political optics.

2B) The difficulty of determining what is a capital gain and what is income is, in fact, one of the biggest theoretical arguments against a zero cap gains rate.

Why remove corporate taxation?

From my perspective, corporations already pay a lower effective tax rate and have access to tax avoidance strategies that not available to the individual.

I've read the argument that eliminating the corporate tax would spur growth but that's like saying eliminating individual income tax would spur consumer spending.

What Harry said.

At the end of the day money is going to land in someone's pocket. It'll be paid out as wages and dividends. A company will spend it on equipment, vendors and consumables. When money is retained, it'll get priced into shares and will get taxed (albeit indirectly) once a shareholder realizes a gain.

Corporations are really good at playing a tax minimization shell game. Big corporations are especially good. This leads to all sorts of nonsense like laundering profits through Bermuda and parking capital outside of the US. In the end all we end up doing is compounding the advantages of size to the disadvantage of smaller corporations. Meanwhile there's the added inefficiency of churning money into tax lawyers.

My expectation is that revenues would increase if we set the corporate tax rate to zero and reallocated the burden to personal taxes.

Because all taxes are taxes on people. Corporate taxes are just a convoluted and bad way of doing so.

Are you proposing that eliminating corporate taxes would mean that somehow you would make more at the end of the day and be taxed less overall?

I'm not sure I see that happening.

If you eliminate corporate taxes then the shareholders of the corporation would make more money(1). You can then make up for the lost corporate tax revenue by taxing those shareholders more. It would be a simpler and more efficient system overall.

1. Probably also the employees would make more and the customers would pay less for products as well. This has to do with something called tax incidence.

Thanks. I'll have to read more about tax incidence.

But naively speaking, what's the incentive for a corporation to increase employee pay in this scenario rather than just maximize shareholder value?

The same incentive they have to pay you anything more than the minimum wage: the market. If there is more profit in the system how that profit gets allocated (higher wages, lower costs to customers, shareholder value) depends on the relative leverage of the various parties involved.