This suite of papers looks at the taxation of income from investments, drawing heavily on numerical analysis using the Kyscope.

Income taxes raise funds for government expenditures. The imposition of income tax can effect people's decisions. It can affect the decision whether to spend money on consumption now or save it for future consumption and be taxed on the interest earned on the savings. It can also affect the decision whether to spend more time at leisure rather than working and paying tax on the wages earned.

Despite these distortions imposed by income taxation, it is theoretically possible to tax income from people's investments in a way that leaves people taking the same sort of investment decisions after tax as before. These investments might be in rental property, commercial property, manufacturing, forestry, horticultural activities (like vineyards, olives and fruit), mining and petroleum projects, infrastructure projects and so on. The theoretical way of taxing income from such investments that has a neutral effect on investment decisions provides a framework for the design of business income taxation that has the potential to produce broad economic benefits.

These broad economic benefits do not include increasing 'jobs', a common catchcry accompanying proposed changes to business income tax arrangements. Aggregate employment levels and unemployment rates are determined mainly by the shape of labour market regulation, the nature of welfare systems and, particularly with an eye to cyclical unemployment, monetary and fiscal policies. The potential benefits of genuine tax reform that pushes towards neutral taxation of investment income are more about better blending the labour force with other productive resources like land and capital to increase living standards through increases in productivity.

People invest directly into particular activities. They also invest indirectly through entities like companies or trusts. They invest in domestic activities as well as activities in other countries. Therefore, an income tax framework with neutral impact on investment decisions must encompass:

• Specification of the tax base - what is to be included in taxpayers' assessable income and what deductions are to be allowed?

• Design of entity taxation - when people invest through entities how are they to be treated for income tax purposes on the income of their entities (including when their entities distribute funds to them and when the entities are liquidated) and when they sell their interests in the entities?

• International dimension - when people invest either directly or indirectly in other countries how are the foreign taxes imposed on their investments' earnings to be treated at home?

In this framework the rate of income taxation can be considered to be of secondary importance. A structure of taxation with neutral impact on domestic investment decisions can accommodate any rate or rates of tax, set to raise government revenue required, without compromising the neutrality outcome. However, introducing the international scene raises two key issues relevant to domestic tax rates and tax revenue. First, the design of foreign tax crediting arrangements is a crucial ingredient to the generalisation of the neutrality framework and one that inevitably involves a trade-off with domestic tax revenue collection. Secondly, if domestic entity and personal taxation were integrated with accompanying full imputation arrangements, the setting of the rate of entity tax would hinge primarily on the level of tax to be imposed on foreigners investing in, or through, the home country.

Against this background, papers that seek to provide a framework for taxing income from investments cover:

• the tax base
• entity taxation
• the international dimension

Additional issues papers deal with:

• capital gains taxation
• negative gearing
• share buybacks
• financial assets and liabilities (including leasing and foreign assets)
• taxing real income
• depreciating tangible assets
• marginal depreciating tangible assets
• cost to revenue of accelerated tax depreciation
• inframarginal depreciating tangible assets
• infrastructure (and other deferred-income) projects
• effective tax rates

Used throughout to aid discussion of the issues are snapshots of numerical analyses from the Kyscope - as well as from the MyProject package to illustrate real income taxation, taxation of inframarginal assets and cost to revenue of accelerated depreciation. Snapshots are shown either as embedded figures or tables or links to pdf or Microsoft® Excel documents. If snapshots do not appear when you click one of the pdf links, you may need to download the latest version of Adobe reader.

For a complete view of the snapshots, maximise use of screen by clicking centre box at top right and then, after selecting paper to be read, click and hold left-hand margin of paper while pulling margin as far to the left as possible.

Version 1.3 © Copyright Wayne Mayo 2010