Taxation without Realization- a Proposal for Accrual Taxation
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Taxation without Realization- a Proposal for Accrual Taxation
TAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationroper structure of the tax system in the United States has focused on the consumption tax as a replacement for the income tax.* 1 While consumption tax advocates argue for fundamental changes in the tax law,2 the most seriously considered changes in the income tax system are merely' incremental in n Taxation without Realization- a Proposal for Accrual Taxationature.3t Associate Professor of Law, University of Pennsylvania Law School.A number of persons were of substantial assistance to me while I was preparTaxation without Realization- a Proposal for Accrual Taxation
ing this article. Dan Halperin originally interested me in the topic, and meticulously reviewed an early draft of the article. Hank Gutman has read anTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxation my conclusions from the economics perspective, and gave me direction in those areas that were less familiar to me. Elizabeth Fogler of the Flow of Funds Section of the Federal Reserve was a constant source of assistance in interpreting the Flow of Funds data and related sources.The analysis of data Taxation without Realization- a Proposal for Accrual Taxation that served as the basis for the discussion of liquidity in Section III of the paper was done for me by Michael Twisdale, who was serving as a WinstoTaxation without Realization- a Proposal for Accrual Taxation
n Fellow of the Institute for Law and Economics of the University of Pennsylvania. I also received assistance from Karen Wolfgang of the Class of 1985TAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxation also provided me with a personal computer that allowed me to make the computations that serve as the basis for the three appendices.Itake full responsibility for the errors that the persons mentioned could not eliminate from the paper.1The stimulus for this debate came from Professor Andrews’ artic Taxation without Realization- a Proposal for Accrual Taxationle, A Consumption-Type or Cash Flow Personal Income Tax, 87 Harv. L. Rev. 1113 (1974). Professor Andrews, in turn, is trying to give a practical strucTaxation without Realization- a Proposal for Accrual Taxation
ture within the context of United States taxation to the proposals that can be found in N. Kaldor, An Expenditure Tax (1955)2See, e.g., Andrews, supraTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationte for Fiscal Studies, The Structure and Reform OF Direct Taxation (1978) (hereinafter cited as Meade Committee Report]. For a much earlier call for restructuring income tax systems, see N. Kaldor, supra note 1.3See, e.g., Gractz, The 1982 Minimum Tax Amendments as a First Step in the Transition to Taxation without Realization- a Proposal for Accrual Taxationa Flat Tax, 56 s. Cal. L. Rev. 527, 551-54 (1983) (arguing that a flat tax proposal would be a logical extension of the 1982 minimum tax amendments);Taxation without Realization- a Proposal for Accrual Taxation
President’s Tax Proposals to the Congress for Fairness, Growth, and Simplicity (1985) [hereinafter President’s Tax Proposals] (focusing primarily on tTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxation to improve the income tax. Professor Kaldor, an important early advocate of the consumption tax, calls the consumption tax a “second best” solution that should be used to supplement the income tax because the defects in the income tax are not likely to be remedied.4 * In his view, the introduction Taxation without Realization- a Proposal for Accrual Taxationof a supplemental consumption tax would not remove the need to remedy the “anomalies and distortions” of the current income tax.6Professor Andrews, whTaxation without Realization- a Proposal for Accrual Taxation
ose support for the consumption tax helped popularize it in this country, presents the problems that arise under the current income tax law very clearTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxation inequity, distortion, and complexity arise out of inconsistency in the treatment of accumulation. . . . Savings out of ordinary income are fully taxed, while accumulation of wealth in kind through appreciation in value of property already owned is not reflected in current taxable income. . . . [Mor Taxation without Realization- a Proposal for Accrual Taxationeover], [s]ome gains, though realized, are unrecognized by reason of special statutory provisions like those governing corporate reorganizations. . .Taxation without Realization- a Proposal for Accrual Taxation
.The way out of these difficulties, according to the accretion ideal, is to make taxable income provide a more comprehensive reflection of real accumuTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationbe taken into account at current fair market value at the end of each accounting period. Although practical exigencies may prevent comprehensive inclusion of unrealized appreciation, improvement is thought to lie in that direction.6Professor Andrews goes on to present his solution to those problems: Taxation without Realization- a Proposal for Accrual Taxation a consumption tax. He, like others who have joined this debate before and after him, advances his solution without fully consider-4See Kaldor, CommenTaxation without Realization- a Proposal for Accrual Taxation
ts by Nicholas Kaldor, in What Should Be Taxed: Income OR Expenditure? 151, 153 (J. Pechman, ed. 1980) (commenting on Andrews, A Supplemental PersonalTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationterest rates. See Kaldor, id.To the extent these changes in interest rates reflect the effects of inflation, they can be compensated for relatively easily under the proposal in this Article. See Part IV, infra. To the extent the changes in value are due to other causes, this Article takes the positi Taxation without Realization- a Proposal for Accrual Taxationon that they ought to be taxed.6Kaldor, id., at 154.8 Andrews, supra note 1, at 1113, 1115-16.1986)ACCRUAL TAXATION1113ing a proposal that has resurfaTaxation without Realization- a Proposal for Accrual Taxation
ced periodically in the last fifty years—an accrual tax system. Under such a system, taxpayers would account annually for all changes in the value of TAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationtracted a large group of adherents because its twin problems of valuation (How can all assets be valued every year?)8 and liquidity (How can taxpayers pay taxes if they do not sell their assets?) have never been solved.9 Even the7One major effect of an accrual system is to tax increases in the value Taxation without Realization- a Proposal for Accrual Taxation of investment assets currently. For summaries of the arguments for and against the taxation of gains on investment assets generally, see L. Seltzer,Taxation without Realization- a Proposal for Accrual Taxation
The Nature and Tax Treatment OF Capital Gains and Losses 83-108 (1951); Blum, A Handy Summary of the Capital Gains Arguments, 35 Taxes 247 (1957).8ProTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationppraisal) would probably not approach the cost of administering the realization requirement. Bittker, Tax Reform and Tax Simplification, 29 Ư. Miami L. Rev. 1, 3 (1974); see also M. David" Alternative Approaches to Capital Gains Taxation 215 n.6 (1968) (“ ‘(TJhere are an awful lot of assets that can Taxation without Realization- a Proposal for Accrual Taxation be valued annually, and I am not sure you should throw out thè opportunity to do that just because others can’t [be valued].”’) (quoting from summaryTaxation without Realization- a Proposal for Accrual Taxation
of conference floor discussion); Wetzler, Capital Gains and Losses, in Comprehensive Income Taxation 115, 161 (J. Pechman cd. 1977) (“For some assetsTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxationiquidity objection is really significant enough to preclude accrual taxation where it is administratively feasible.”). Professor Shoup states that under a system of current accrual of gains and losses “the simplification achieved for the income tax law as a whole would of course be enormous.” Shoup, Taxation without Realization- a Proposal for Accrual Taxation The White Paper: Accrual Accounting for Capital Gains and Losses, 18 Can. Tax J. 96, 97 (1970). Professor Shoup was director of research for a studyTaxation without Realization- a Proposal for Accrual Taxation
in 1937 by the Twentieth Century Fund that concluded that all increases and decreases in values of capital assets should be recognized on an annual baTAXATION WITHOUT REALIZATION: A PROPOSAL FOR ACCRUAL TAXATIONDavid J. SHAKOwtI. An Overview of Accrual TaxationFor over ten years, debate about the pr Taxation without Realization- a Proposal for Accrual Taxation however, was subject to the rather significant caveat that the attendant administrative problems must be solved. See id. at 490.9Language in some early Supreme Court decisions suggests a third potential problem: the constitutionality of an accrual tax system. See, e.g, Eisner V. Macomber, 252 U.S. Taxation without Realization- a Proposal for Accrual Taxation189, 207 (1920) (Income is not taxable unless it is “a gain accruing io capital, not a growth or increment of value in the investment.”); Gray V. DarlTaxation without Realization- a Proposal for Accrual Taxation
ington, 82 U.S. (15 Wall.) 63, 66 (1872) (“Mere advance in value in no sense constitutes the gains, profits, or income specified by the statute.”), quGọi ngay
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