Does Taxing Capital Encourage Capital Formation?

At first look the reply appears apparent—no.  However not everybody sees issues that approach. Right here’s Bloomberg:

Biden can even ask lawmakers — as he did in final 12 months’s funds request — to impose the 21% minimal on multinational firms, which the White Home says would end in substantial new taxes on pharmaceutical firms. He additionally needs to quadruple the tax firms should pay once they purchase again their very own inventory to 4% from 1%. Democrats have proposed buyback taxes as a option to encourage firms to put money into workforces and tools over share repurchases.

Companies have a number of other ways of rewarding buyers.  One technique is dividends.  One other method is to make use of a inventory buyback, which ends up in capital features.  Many buyers desire to obtain capital features, that are typically handled extra favorably than dividends within the federal tax code (partly as a result of the features will not be taxed till the inventory is bought.)  By taxing inventory buybacks, the federal government can be elevating the efficient tax fee on capital formation.

These taxes don’t encourage funding—simply the alternative.  As a substitute, they have a tendency to push funding into much less productive areas.  Thus suppose firm A can earn a 5% fee of return on capital and firm B can earn a ten% fee of return.  Ideally, earnings earned by firm A can be paid out to homeowners, who would redirect funds to investments made by firm B.  This tax provision appears motivated by the need to make every firm extra independent, relying by itself inside funds for capital funding.  However an financial system the place every group is self-sufficient is way much less environment friendly than an financial system structured round specialization and commerce.

Maybe there’s another motivation for this proposed tax change.  If that’s the case, I can not think about what it’s.