Notes on cash - flow taxation
Under cash-flow taxation, a country can tax the cash flow of domestic producers, domestic residents, or domestic citizens. The implications are different in each case. The paper examines the positive and normative effects of various versions of a cash-flow tax, focusing on the effects of such a tax in a small open economy. A country must decide, for example, whether investment in each type of asset will be taxed based on its cash flow or will instead be entirely tax exempt. The economic implications differ, depending on whether the government decides or the choice may be left to each tax payer. In addition tax flow rates may vary: as a result of a progressive rate schedule; according to the type of tax payer; or over time, depending on economic conditions. Substantial problems can result from each type of variation. Finally, inequities can arise during the transition to a cash-flow tax. Different inequities arise depending on what tax precedes the cash-flow tax. And a partial introduction of cash-flow taxation may open important arbitrage opportunities.
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