Genuine question, as I am not well versed in finance:

What else would those with capital do other than invest? That is, it seems like investment is clearly better than holding cash, regardless of the tax rate (with some caveats, e.g. not being in a deflationary economic state).

Those with capital would still be best off investing in some manner. Tax loop holes in other countries may cause some expatriation of that investment but if those are closed then investment will continue but most money will be taken out of the economy during the investment cycle. Assuming this doesn't just lead to the government taking in massive amounts of money and not using it this would allow income tax rates to be reduced and spur consumer spending.

It's a pretty simple issue of a high pressure leaky container, jam a wedge in one leak and the other leaks need to contribute more if you want to maintain the same amount of water coming out. Simplify the tax code and we even end up losing less money to trying to remember where all the leaks are.

They would indeed invest it, but they would demand dividends be paid in natura. There would be a type of business where, you invest 5%, you become a director there. With free use of a yacht, private plane, car (these businesses come in all sizes, you essentially get 5% from what would be dividends to be spent as you wish as long as accounting can make it work), a hotel/travel budget, ... all these would no longer be personal expenditures, but business expenses.

In actuality these businesses exist (even much more dirty: in practice, bank employees on occasion demand they be offered this, in trade for not sabotaging a loan. This is pretty common practice). But even "fairly", with actual investments, these businesses exist.

And no, this is not illegal, nor do you want to make this illegal.

I do want to make it illegal, if you get a company car it is considered a benefit and you will be taxed on the value (either lump sum or by accrued value depending on things) and I believe this is fair and correct.

These sorts of soft benefits should be taxed at their value as their value is being incorporated into the decision to purchase or continue to hold. And, bonus thing, most people at the lower end of the income scale have no access to these soft benefits so excluding them from taxation is a regressive policy.

It'd be nice if everyone came to the realization that the easiest way to exchange a gained/earned asset would be money and then companies just rented out use of a yacht at the market appropriate price. This can cause a bit of craziness for things like "family discounts" but those, again, are discretionary benefits which are being offered to tip the ideal price point, and things of that class come with the added benefit that they usually will fall foul of discrimination laws under any casual examination.

Okay, now explain how cars that are necessary (such as for a director, that needs to meet with partners, customers, ...) should be taxed. Or how about for a cleaning company that sends out cleaners in cars, there's a lot of those. Would you seriously tax the poor cleaner for the value of the car ? How should Elon Musk be taxed if he bought a bed for sleeping at his megafactory ?

How about the office in which you work ? Should you be taxed on the value of the office building in which you work ? How about the value of the machines ? How about the coffee machine (which you may or may not use) ? How do you intend to check this ?

Even that is the very tip of the iceberg in terms of problems with this policy. Will you be able to catch abuses at the extreme ? Sure. Will you be able to prevent this from becoming a widespread alternative to paying out dividends using policy ? No.

Doesn't the IRS require reporting and tax payment for these non-cash fringe benefits?

Sure but they're never 100% fringe benefits. A director "has" to drive around meeting people. Customers/partners, hell even IRS representatives. So the car is taxed at 10%, because only 10% is used privately.

Even that doesn't help because "taxed" in this case is a big word for "taken out of what the company pays the person". Which means the company pays in situations where the person controls the company, for obvious reasons.

They invest in lower risk securities which leads to a bull market in bonds and guilts which has its own problems.

It also stifles innovation and messes up pensioners as their income is based on gilt yields.

I don't understand why investors would do this, it seems like an unnatural response. If all capital gains are being taxes as income these investors would just voluntarily be choosing to make less money if they picked this strategy.

Their strategy selection would equalize to being about what it is now but each cycle would yield them less money to reinvest and yield the government more money to invest. It can be your opinion that private investors are more efficient than the government but funding our "necessary services" (i.e. having an army, what not) is so deprived of income that it is being extracted through a regressive income tax.

FYI, I'm all for cutting pork, but the income stream and what we end up spending that money on are two different issues.

> They invest in lower risk securities

That's still investing and the idea that higher taxes on capital income would reduce yield targets for capital investments is backwards.

Seems like they’d need a higher return due to higher tax.

So tax the poor, and subsidize the rich?

Reality is pretty much the reverse in at least one important way:

https://www.forbes.com/sites/michaeldurkheimer/2018/03/01/0-...