TTPI Working Paper 6/2019

Taxing capital income and the Z-tax solution


David Ingles, Senior Research Fellow, Tax and Transfer Policy Institute, Australian National University


This paper looks at issues with conventional approaches to capital income taxation, such as the income tax, the capital gains tax and the cash-flow consumption tax, and finds that there are difficulties with all of these. It proposes an alternative solution based on treating ordinary capital income in the same manner as capital gain, with tax deferral until drawdown. To achieve this it relies on a novel combination of two taxes, the pre-paid and the post-paid consumption tax, whereby tax levied under the latter takes account of tax previously paid under the former. In other words this ‘Z-tax’ is a modified form of cash flow consumption tax where much of the tax is payable up front. It potentially allows all capital income to be treated similarly, and allows excess returns – economic rents – to be taxed.


The working paper is available here.

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