Setting aside the question of morality as it relates to coercing citizens to part with their property, let us consider a tax regime based solely on the stock market. (Also, assume a Bitcoin standard.)

Equity-Based Tax System

In this system only top publicly traded companies are taxed. Taxation takes place in-kind, through shares. Only, say, the top 500 companies (by market capitalization) in the country are in consideration for taxation. And the taxation occurs thus:

  • The top 100 companies are taxed 1% of the number of shares outstanding.
  • The next 100 are taxed 0.75% of the number of shares outstanding.
  • The next 100 are taxed 0.50% of the number of shares outstanding.
  • The next 100 are taxed 0.25% of the number of shares outstanding.
  • The last 100 do not have to pay, but their presence in the top 500 indicates they should have their finances in order for future liabilities.

It is important to note the following.

  • The number of shares outstanding is calculated on a mean basis.
  • The companies can issue the requisite number of shares to meet their tax liabilities. Thus, profits remain untouched.
  • The government sells these shares in the open market for Bitcoin. This results in more of the shares of these top companies being available in the market; thus, it is dilutive to the shareholders. (Essentially, it is a reduction of the purchasing power of the shareholders. But such reductions in purchasing powers occur in case of currency inflation and direct taxation as well.)
  • The government budget is limited by the Bitcoin that can be obtained by selling these shares. (Bond issuance would be at near zero discount. A Bitcoin standard world is, as you may already note, an equity-driven world rather than one laden with debt.)
  • The government may choose to not sell the shares. But it shall not get any voting rights corresponding to those shares.

A Simple System

No income tax. Working is not penalized. No tax based on revenues. Entrepreneurship is not penalized. No tax based on profits. Efficiency is not penalized. No capital gains tax. Good capital allocation is not penalized.

Outside the top companies, no one needs to handle taxes. Accounting simplicity.

No multiple taxation. All other wealth, consumption, sales, death, etc. taxes are absent.

It’s simple and direct. Since only 500 or so companies are considered, it is not easy to evade taxation.

This is the system of taxing the most fortunate. (Being fortunate, here, is not just being randomly lucky. Entrepreneurial vision, risk taking, efficient management, and hard work do go into making the fortune. But those who do not find luck despite the above are not taxed.)

The Merits of This System

It’s Simple, Single, and Voluntary

In addition to simplicity and the absence of multiple taxation, this system would be far more voluntary. Right now, mere existence makes you liable for multiple forms of taxes on the same unit of money. But in this system, you could simply not own the top companies if you do not want to incur taxes indirectly. (Of course, then you also forego the potential upsides of owning the stock.) And if you run a company that does not want to have tax liabilities, don’t go public. (But then you lock your company out of the public capital market. Ultimately, availing public capital and potentially in the future becoming large enough to pay taxes in the form of issued stock is not a bad deal for a company.)

Also, with only a small number of companies to tax, and with a simple system, tax fraud and tax avoidance may be thwarted.

Doesn’t This System Penalize Achieving Economies of Scale?

Yes, but only at the largest level. The current system does so at all levels. Here, you are untaxed unless you get very large. And at that point, some break-up pressure due to a 1% outstanding shares tax might not be a bad outcome.

At the very least, this system distorts the market the least while still collecting a reasonable amount of tax.

And if this distortion is still too much, or if taxing the top exerts relocation pressure on companies, we can consider adjusting the parameters (smaller percentages for more companies).

Highly Favorable for Business

The companies do not have to worry about securing extra funds for taxation. They simply issue stocks as they normally do to raise capital. Even if the 1% of outstanding shares in absolute monetary terms is a large part of the company profit, since the profit itself is untouched, the businesses should not find this so burdensome as to look for a different location.

Despite the fact that getting to the top attracts tax liabilities, companies would still want to get there. Being a top 500 company would attract passive capital inflows through index investing. (Although this effect, under a Bitcoin standard, should be less prominent than it is today. Index investing has grown in no small part due to how inflationary fiat is.)

Are the Revenues Thus Collected Enough?

Well, it better be. The government needs to be efficient and non-meddlesome, providing only essential, non-excludable services like defense.

Besides, the economy, like many other systems, follows a power law distribution. Large companies do account for the largest share of the total wealth.

Some parameters might need adjusting: the percentage of shares or the total number of top companies affected. But the main goal of the government should be to make the system extremely business friendly, so that companies can grow and as a consequence, be able to contribute more in taxes.

Doesn’t This Make the Revenues Dependent on the Performance of the Stock Market?

Yes. The concerns about fluctuations in the stock market are valid.

However, inflationary policies (excess money printing) is largely responsible for market swings. Under a Bitcoin standard, where the government cannot print money out of thin air and pump the market with paper thus created, the market, as a whole, would be far less wild. Individual stocks can still swing significantly, but the government, holding 400 different kinds of large stocks would not need to be overly concerned with that.

Of Course, There Is Still Dilution

There is no getting around the fact that the purchasing power of a certain segment of the population is expected to dip. The issue of shares dilutes the value of shares, all else equal. The tax burden is borne by the owners of the largest companies. So this would be not just the management of these companies, but also ordinary citizens owning these top stocks.

Effectively, the tax burden on the company is passed down to every owner of the company through dilution of their purchasing power.