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The Resource Taxing capital appreciation

Taxing capital appreciation

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Summary
The realization rule - which defers tax on asset gains and losses until a disposition - is a well-known flaw in the income tax. Tax scholars have long recognized that the rule causes inequity, inefficiency, complexity, and revenue loss; allows wealthy taxpayers to avoid the income tax; and distorts the taxation of corporations and capital gains. The realization rule was a problem in the past, and a greater problem now, as financial innovations increase the opportunities for abuse and the need for reform. Prior proposals have generally favoured replacing the realization rule with an accrual method accounting for the timing of gains and losses, through mark-to-market taxation, which taxes observed changes in asset value, formulaic taxation, which taxes deemed changes in asset value, or a combination thereof in a mixed regime. While these proposals have attracted much academic interest, they have not gained political traction, due to concerns of administrative feasibility, taxpayer liquidity, behavioral distortions, and public acceptance. This article first introduces a framework for evaluating realization rule reform proposals, based on the rule's harms and justifications, and demonstrates that none of the prior proposals adequately satisfies the framework's criteria. It then introduces a new approach to taxing capital appreciation, "Deferred Tax Accounting", which integrates accrual principles within the current realization system. Deferred Tax Accounting has two components, a flexible payment rule for traded or regularly valued assets, and a retrospective rule for nontraded assets that are not regularly valued. Deferred Tax Accounting allows taxpayer choice in timing tax payments, and - as under current law - never requires payment of tax prior to a realization event
Language
eng
Work
Instance
Label
Taxing capital appreciation
Title
Taxing capital appreciation
Creator
Subject
Language
eng
Summary
The realization rule - which defers tax on asset gains and losses until a disposition - is a well-known flaw in the income tax. Tax scholars have long recognized that the rule causes inequity, inefficiency, complexity, and revenue loss; allows wealthy taxpayers to avoid the income tax; and distorts the taxation of corporations and capital gains. The realization rule was a problem in the past, and a greater problem now, as financial innovations increase the opportunities for abuse and the need for reform. Prior proposals have generally favoured replacing the realization rule with an accrual method accounting for the timing of gains and losses, through mark-to-market taxation, which taxes observed changes in asset value, formulaic taxation, which taxes deemed changes in asset value, or a combination thereof in a mixed regime. While these proposals have attracted much academic interest, they have not gained political traction, due to concerns of administrative feasibility, taxpayer liquidity, behavioral distortions, and public acceptance. This article first introduces a framework for evaluating realization rule reform proposals, based on the rule's harms and justifications, and demonstrates that none of the prior proposals adequately satisfies the framework's criteria. It then introduces a new approach to taxing capital appreciation, "Deferred Tax Accounting", which integrates accrual principles within the current realization system. Deferred Tax Accounting has two components, a flexible payment rule for traded or regularly valued assets, and a retrospective rule for nontraded assets that are not regularly valued. Deferred Tax Accounting allows taxpayer choice in timing tax payments, and - as under current law - never requires payment of tax prior to a realization event
Citation source
In: Tax law review. - New York. - Vol. 70 (2016), no. 1 ; p. 111-176
http://library.link/vocab/creatorName
Glogower, A
Geographic coverage
North America
Language note
English
http://library.link/vocab/subjectName
  • appreciation
  • deferral
  • disposal
Label
Taxing capital appreciation
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      Rietlandpark 301, Amsterdam, 1019 DW, NL
      52.3736660 4.9336932

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