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I generally stay out of tax debates. I don’t know the economic theories, and valid comparisons are difficult to make.

This comparison by Rodney Hide (via Kiwiblog) bothered me, however:

A business generates $100 a year. The going discount rate is 10 percent. The value of the business is $1,000. That’s if there’s no tax.

Introduce a tax of, say, 30 percent, and the business now yields only $70 a year. The business is worth only $700. The tax liability is capitalised into the value of the business.

Hyde’s no-tax baseline may be official ACT policy, but it isn’t the correct counterfactual. We should compare the tax treatments of different investments, given the objectively observed existence of taxes. Let’s look at the tax treatment of an alternative investment:

A bond yields a return of $100 per year. The going discount rate is 10 percent. The bond yield is treated as income for tax purposes and taxed at 30 percent. The bond is worth $700.

Under current rules, income from capital ownership that is treated as interest income is taxed, while income from capital ownership treated as capital gains is not. Instituting a capital gains tax would address this difference.

But let’s take this one step further. Consider human capital, not physical capital. We’ll start with Hide’s introduction, but change the ending:

Imagine a young widow with children ….’ She has immigrated to New Zealand after her husband was brutally murdered by Maoist tax collectors. She gets an entry-level job in tourism. She starts attending university to integrate into her new country and better her family’s future. She graduates, and becomes General Manager – Tourism for her company.

In this situation, she has invested in her education from after-tax dollars. The return on her investment is also taxed, and at a higher marginal rate than before. This situation certainly looks like double taxation.

By Hide’s logic, the educated among us are over-taxed. There’s a policy position I could support.