Reforming taxes on equity capital

This chapter deals with how equity capital organization and governance has fostered increasing wealth and income inequality. Specifically, the increasing separation of ownership from control associated with the emergence and evolution of fiduciary capitalism has seen a marked transition of managerial compensation, from wage income to capital income using contingent equity compensation to defer the payment of tax and lower the marginal tax rate when the capital income is finally realized. This transition has been compounded by the dramatically expanded use of share buybacks instead of dividends to return profits to corporate shareholders, resulting in a shift from taxation of (current) dividend income to deferred capital gains taxation. The expected common stock price increase associated with share buybacks has been accompanied by the accumulation of onshore and offshore cash balances and investment assets that further support an increasing share price. Such changes have permitted both managers and wealthy shareholders to exploit the realization principle associated with deferred tax on capital income to fuel increasing inequality in levels of wealth and income.