Public Finance, Inequality, Cash Flow
r = normal rate of return + risk + rents
When most people think about inequality and power imbalances in society, they think about rents. They think about corporations deriving supernormal profits/extraordinary returns from extensive market power, rent-seeking, government protection of an industry, or a misrepresentation of income which one could view as unethical. The literature suggests that "a uniform capital income tax collects revenue at a high rate, (1+r)/r times higher than a wealth tax, from all these components." A wealth tax can produce the same amount of revenue, but it would be done so through taxing the principal. What does this mean? Choosing to use wealth relieves rents which are exactly what we're trying to tax, extraordinary returns. If you want to be less distortionary and focus on supernormal profits, you should favor a 20 percent capital income tax over a 2 percent wealth tax.
There are many ways we can utilize the current tax code to expose us to supernormal profits, but still be consistent with sound tax literature. For instance, you can deduct the investment from capital gains(thus reducing the burden on "savings") and then tax the return. This gives the IRS some exposure to supernormal returns while maintaining that the code is conducive towards investment, placing weight on the correct tax element, correcting the base, and not relieving pressure on rents.
Does this tax logic sound attractive? It should! And you can apply this to the tax base in general. On the intensive margin, the tax base reduces normal returns. Lower after-tax returns reduce investment, productivity, wages, and economic growth. To address this, we want to exempt the normal return and focus on taxing cash flows and consumption. On the extensive margin, we focus on entrepreneurship, long-run dynamism, and tax competition. What we want to do is minimize marginal tax rates on capital and limit average effective rates(tax burden) from rising above international norms and factor in incentives such as relations to the labor supply.