Taxation of Income from Capital

Abstract Features of the US tax system and law are employed to illustrate the complexities that arise in practical discussions of tax policy: the tax treatment is considered of income from assets held by households, non-corporate businesses and corporations under US tax law, and for assets held in each sector an appropriate cost of capital and rate of return is defined. The chapter begins with the household sector, where the taxation of income from capital takes its simplest form. The taxation of income from non-corporate business is then considered — this is treated as fully distributed to its owners (individual income tax). Next, an analysis is made of the taxation of corporate income, which requires the integration of provisions of individual and corporate income tax laws. The last two sections of the chapter discuss tax reform and alternative approaches.