Taxes on Capital
A tax on capital is any government charge on the producers of capital or on the consumers of capital. For the purposes of this discussion the economic meaning of capital is used, that is, any form of wealth capable of being employed in the production of more wealth., rather than the accounting term which refers to the symbolic representation of such goods as money.
In classical economic analysis the return on labour is wages, the return on capital is interest and the return on land is rent. Of course, taxation accounting has only the most tenuous relationship with this empirical reality. It is rarely the type of activity that one derives wealth from that is important for the tax office, but rather the institutional structure that one adopts. Thus at certain break-points (net income of approximately c$75,000) it becomes convenient for individuals in Australia to re-arrange their circumstances declare themselves as business and thus be charged the flat "corporate" tax rate rather than the progressive individual income tax rate.
Unlike labor, capital can be owned in shares and interest need not be individualized (though it often is). What is called "dividends" in later day financial parlance is, in fact, interest in the economic sense of the term. In financial parlance much of what is called "interest" is actually economic rent. This is certainly the case in "capital gains tax".
These caveats aside, many returns on capital do come under the burden of corporate taxation. The effect of taxing capital returns is the same as the effect as taxing labour; it dimishes the desire to invest in such activity, it includes "deadweight loss", it reduces trade and it reduces productivity.
Corporate taxation in Australia is Federal, direct and flat. Being direct it is subject to significant political criticism by those whom the burden falls on. Being a flat-rate tax means that there is a significant disincentive to adopt a corporate structure at relatively low levels of returns (below c$75,000) and a high incentive to adopt that structure at higher levels of return which increases as returns increase.
An extremely damaging form of capital taxation is local council rates on buildings. Taxing the value of a building reduces the construction of buildings and in particular, high quality buildings. It promotes sprawl as a land user is effectively punished for making efficient use of the site. Home-owners hide the true value of their home - a place may be magnificant inside, but look almost like an abandoned building from the outside.
