Taxing capital appreciation

Resource Information

The work Taxing capital appreciation represents a distinct intellectual or artistic creation found in International Bureau of Fiscal Documentation. This resource is a combination of several types including: Work, Language Material, Continuing Resources.

Label

Taxing capital appreciation

Creator

• Glogower, A

Subject

• appreciation
• deferral
• disposal

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

Geographic coverage

North America

Language note

English