... which was of course taxed to the recipient.
Okay. But Michael asked what the effects of taxing it might be since the budgetary effects of the div tax cut seem so small. Of course, the #s I gave don't account for the amount that debt would be reduced if it was no longer tax exempt. (What is current thinking on the interest elasticity of debt?) Even if debt is very sensitive to changes in interest rates (ie elasticity is 2), that still leaves you with $110 billion more in gov't revenue on debt taxes. Not counting the revenues from not having to bail out over-leveraged firms, banks, etc.
The more interesting question is whether such a tax increase would impede economic performance measured, say, by real GDP. On the last point, Peter Warburton has an interesting graph in his book _Debt and Delusion_. It shows domestic credit as a portion of nominal GDP plotted against real per capita GDP. In the 1990's (his data go to 96), the lines for the US and Japan, for example, go just about straight up. That means that the increased use of debt has not really changed real per capita income. In his numbers, that includes household debt. But, as Nomi pointed out, and fedreserve stats support, bond issuance increased in the US as economic growth was tanking. Is there any good data out there about the coincidence of debt and economic growth?
To put this another way: Max, does the argument for not taxing capital refer to increased income that would go along with increased debt? Or is it mostly, "Since the consumer pays all that tax anyway" there should be no tax on capital? Or is it something else altogether?
Christian