TITLE:
Tax Reform for a Fairer, More Vibrant Economy
AUTHORS:
Lok Sang Ho, Tianle Zhang
KEYWORDS:
Tax Reform, Economic Rent, Rent Intensity, Progressivity, Efficiency
JOURNAL NAME:
Modern Economy,
Vol.7 No.8,
July
28,
2016
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 [1] 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.