Chapter 5
Capital Appreciation

Consider unrealized accrued gain which is attributable to property appreciation: 

1)  Is this appreciation includible currently in gross income for FIT purposes (i.e., under the tax statute, i.e., Code §61)? 

2)  Does the U.S. Constitution permit tax legislation to enable (if desired) the inclusion of this (economic) income in gross income?

The “Realization” Doctrine                 

See IRC §1001(a)  concerning realization being required for FIT for a gross income event to occur from a property transfer transaction. 

I.e, must there be more than only an economic increase in the value of the property owned?

Cf., under the Haig-Simons definition of income (a “realization” event is not necessary).

Does the 16th Amendment require a “realization event” for gain recognition on property investments? Answer:  No. (& Art. 1, §8, Cl.1 ?)

Eisner v. Macomber (1920)                       p.225

Does the 16th Amendment permit taxation of a “stock dividend” distributed by a corporation?

A U.S. constitutional inquiry:  Does the U.S. Congress have the power to require income recognition on this stock-for-stock distribution?

Note: After the distribution the total value of each shareholder’s shares remained unchanged. 

USG says GI inclusion is required to the extent of the par value (not fmv) of new shares.

Majority: income is “gain derived from.”  cont.

Eisner v. Macomber,

Majority opin. - Reference to 16th Amendment:  Income must be “from whatever source derived.”  A stock dividend represents a “capitalization” of accumulated profits (& not income) – and nothing is “derived from.”

Therefore, nothing is received from the corp. in the manner of any recognizable income. 

Held: 16th Amendment precludes this taxation.

Holmes dissent:  This proposed taxation does not violate 16th Amendment requirements.

Eisner v. Macomber,

Brandeis dissent (p. 238): 

This proposed taxation does not violate 16th Amendment requirements re defining income. 

This is the equivalent of a cash dividend with the cash amount being used (by all shareholders proportionately) to purchase additional shares of the dividend paying corporation. 

Therefore, the deemed receipt treatment enables gross income inclusion.

Unrealized Appreciation As Includible in GI

Does a constitutional requirement exist of a realization event to occur to have income? 

Or, can gross income be determined (for FIT purposes) on a “mark to market” basis?

Does any non-taxation of accrued stock appreciation distort investment decisions, i.e., producing a “lock-in effect”?   Cf., e.g., §1014.

What is appreciation for this purpose? See p. 250 examples re, e.g., “professional credentials.”

Corporate Tax Effects of a Stock Dividend

See §305 re corporate stock distributions. 

§305(b) identifies taxable situations – where the stock dividend structure enables changes in shareholder ownership percentages.

Note, further effects:

basis allocation (§307), and

“tacking” of holding period (§1223(5)).



See Economic Definition of “Income”

P. 254. 

Haig-Simons definition of “income” is:

Value of rights consumed during the year, and

Change in value of retained property rights.


No “realization requirement” is embedded in this definition.

Time Value of Money

Possible relevance of timing considerations:   either (1) acceleration, or (2) postponement of:

either (a) income or (b) deductions.

Important relevant economic factors:

1) Changes in tax rates (whether in (a) statutory tax rates or (b) individual circumstances);

2)  Time value of money, i.e., the interest return benefit on the deferred income tax payments.  Query:  What is the “present value” of the future payment?

Pay Tax Today or Tomorrow?

Tax planning objective is deferral of tax liability: 

(1) delay income & (2) accelerate deductions (unless tax rates are to be increased).

What is the importance of the “time value of money” concept?  Economic value accrual.

Note:  Simple interest vs. compound interest.

How often should compounding of value accretion occur:  Yearly, monthly, daily?

Consider timing of income tax payments 

Timing alternatives:

1)  Pay the income tax today?

Defer the tax payment for five years?

Pay small or large interest percentage per annum on a compounded interest charge to the IRS?


Asset Valuation and Financial Analysis

1) The fair market value of an asset is the

sum of the present values of all future yields on the particular asset.

2) These “yields” can include interest, dividends, rents, gains, sales proceeds & liquidation proceeds.

3) What if the stated interest rate (e.g., a debt instrument) does not equal the market interest rate?  Then, different values for the instrument, i.e., face vs. fmv.   A “discounted” obligation.

Bruun – p. 261
Lease Cancellation

Tenant constructs (in 1929) a 50 year life building on owner’s land.  Lease for 99 years.

Tenant defaults and lease is cancelled in 1933.

Did owner realize income at lease cancellation when the owner gets possession of the building?

Held: yes, gain is realized in 1933 (at forfeiture).

Held: not income like rent (p. 263).

Cf., Blatt case (Sup. Ct., p. 263):  income from improvements each year of the lease until expiration? 

Cf., earlier Blatt case
Sup. Ct, p.263

Income from improvements each year of the lease until expiration of the lease? 

Note different possible factual variants in this lease termination context:

Lease to exceed useful life of the building

erected by tenant.

2)   Useful life of the building to exceed the specified duration of the lease.

Timing Choices When Leasehold Improvements

1) Time the lease is agreed, with the lessee’s promise to build an improvement to property.

2) When the building is built – to the extent of the anticipated FMV at the end of the lease.

3) Each year as the lease is getting shorter.

4) When the lease expires (Bruun).

5) When the land and building are subsequently sold. See  §§109 and 1019.  Postponed income realization - except where the building is constructed by the tenant “in lieu of rent.” 

Code §109 & §1019
Deferral Is Permitted

Recognition of gain realized at lease termination is deferred until the property disposition.

Tax basis for the improvements received is zero under §1019 - since no gross income inclusion.

Therefore, subsequent rental income from the property is not reduced by depreciation (since no depreciable tax basis is available).

Result: a portion of the deferred income is actually includible prior to the disposition of the property (since no depreciation deduction).

Cottage Savings Assn.-
Loan Package Swap p.265

Facts:  Financial institution exchanges a group of its residential mortgage loans for another institution’s mortgage loan package.

A swap of “participation interests” occurs.  Long-term existing low interest mortgage obligations had declined in value due to a significant increase in market interest rates.

Seller did not want to record losses on its “books,” i.e. for regulatory and financial accounting (i.e., shareholder) purposes.     Cont.

Cottage Savings Association,           cont.

Issue:  Did a tax disposition event occur? Were  the new properties “materially different”?

Holding:  This exchange does cause losses to be realized for federal income tax purposes (even though not for regulatory purposes).  Cf.,  Memo R-49.  An exchange did occur of “materially different” properties.

Cf.,  no inclusion in gross income when based merely on property appreciation in value even if an “economic accretion to wealth” occurred.

Cottage Savings Association,           cont.

Consider the IRS litigating position in Cottage Savings. What was achieved by IRS losing case?  Should the Cottage Savings tax litigation result have been controlled by the required time for reporting for financial accounting purposes (particularly when the financial accounting is dictated by another government agency)?

Consider that this transaction was done “solely” for a tax avoidance purpose (i.e. no business purpose – except to survive with a tax refund).

Constructive Sales   p.274
& Identification Issues

First issue:  How to determine which property was sold – when multiple lots of fungible property (e.g., listed shares).

Example:   Purchase 100 shares for 10x; 

later purchase of 100 shares for 15x;

Then sell 100 shares for 25x.

Which shares are sold?

Ordering rules:  default rule is FIFO for stock;  Reg. §1.1012-1(c).                           continued

Tax Basis Identification Issues               continued

Exception for using specific ID;  e.g., want to use higher basis (later purchased stock) to limit amount of gain realized.

Possible specific ID if different accounts - §1012(c). 

Option: use an average basis method.

Mutual funds:  Average basis. Reg. §1.1012(e). Average basis for dividend reinvestment plans (DRPs).

Short Sales              P.275

Short sale transaction: 

Borrow shares & sell those shares (e.g., at 10x).

Borrower owes these shares to lender.

Borrower hoping that shares decline in value.

Then buying shares to close the borrowing transaction.  

Profit if buying the shares to close out the transaction for less than 10x.

Deemed Realization – Constructive Sales   P.276

Objectives: How to (1) raise cash,

(2) protect against downside risk, &

(3) delay income tax realization?

E.g., “short sale against the box” – possible to sell borrowed shares? - assuming the loan of the borrowed shares can be subsequently closed

with currently held similar shares &

(2) when accrued appreciation has disappeared (e.g., with §1014 tax basis step-up at death). 

Deemed Realization –
Code §1259               P.276

§1259 – gain is to be recognized for federal income tax purposes on a constructive sale of an “appreciated financial position.”

Cf., treatment of the purchase of a “put,” i.e., right to force purchase at a specified price –

still have upside potential on the investment, but protected against downside risk with the ownership of the “put.”   Similar treatment for futures or forward contracts?

Constructive Sales, cont.

Alternative structures possibly triggering applicability of Code §1259:

Example:  Zero-cost “collar” transaction –

-  Sell a call option exercisable at a price above current fair market value (i.e., option holder exercises if FMV above option price).

-  Buy a put option (same maturity) at price  below current FMV. Exercise if price below put.

Does this constitute a constructive sale (i.e., limited future risk)?  Possible §1259 regs.?

Nonrecognition Treatment

Code §1001(c) provides that “except as otherwise provided in this subtitle” gain or loss shall be recognized.

Nonrecognition provision:  Code §1031 provides that no gain or loss shall be recognized on the exchange of property held for “productive use in a trade or business or for investment” if property is exchanged solely for property of a “like kind.”  Not all property is eligible.

Nonrecognition Treatment

Why provide for this gain postponement?

Concern about illiquidity or valuation?

Mitigation of an investment lock-in effect?

How retain the future potential for income tax recognition of that gain?  Answer: Preservation of the unrecognized gain (or loss) in determining the income tax basis for the replacement property.  See §1031(d). 

Alderson case     
p. 277

Was this actually a property swap within the requirements of §1031 – when a four party transaction (including two title companies) was concluded?  Or, a purchase of the replacement property for cash by taxpayer?

What was the concern of the IRS is seeking to disallow §1031 treatment? 

Possible access to cash for the taxpayer?

Nonrecognition Treatment
& “Boot” Received   p.277                       

How deal with situations when an imbalance of values exists?  One party contributes cash to provide the balance  of consideration in the transaction.

How treat this “boot” for federal income tax purposes?  See §1031(b) for gain recognition to the extent of the realized gain when boot is received. 

How is the Gain Potential Kept for Tax Purposes?

Tax basis for the replacement property is:

1)  Same as the tax basis for the property transferred;

Decreased by the “boot” received;

Increased by the gain recognized on

exchange (i.e., the lesser of the realized gain or the boot;  i.e., if no gain, then no taxable boot).

See §1031(d) providing the rules for a transferred tax basis for replacement property. 

Boot Issues
Problem 2a, p. 282

1) Greenacre worth $3,000 or less – then no

 gain or loss.  Basis will be $3,000.

2) Greenacre is worth $10,000 or more – then $7,000 gain is recognized and basis is $10,000.

3)  Greenacre between 3,000 and 7,000 FMV – then gain realized to the extent exceeding $3,000;  basis is equal to value of Greenacre.

Boot Issues
Problem 2b, p. 282

B owns Whiteacre with $24,000 tax basis and transfers Whiteacre for Purpleacre and $17,000.

No boot received by B;  no tax to B.

B’s basis for Purpleacre will be $41,000.

B is putting more money in rather than getting money out.

Is the cash purchase really part of the exchange transaction?  I.e., is it outside Code §1031? 


Related Party Exchanges
Problem 3, p. 282

F’s sale within two years of the exchange with E  will trigger F’s gain.  §1031(f)(1) & (3).

Siblings are related parties within §267(b)(1) and (c)(4). 

Would tax avoidance be a principal purpose here?   See § 1031(f)(2)(C).

Spouses are also related parties for purposes of this rule.

Like-Kind Exchange
Deferred Property Receipt

“Starker” exchange – p. 283.

Delayed receipt of the exchange property – by relying on the creditworthiness of the other exchanging party.  Does this qualify as a §1031 exchange (when receiving only a “promise”)?

What if an “interest charge” equivalent is credited to add value to replacement property purchase for the deferral of the exchange?

Deferred (i.e., “Starker”) Exchanges              P 282

Specific requirements:

To enable deferral Code §1031(a)(3) specifies:

Identification of replacement property within 45 days,  and

Receipt of replacement property within 180    



Identifying “Like Kind” Property                   P.283

Is like-kind treatment permitted for:

1) Different types of real estate? Cf., TICs;  sale-leasebacks (how long a lease?; cf., Jordan Marsh case);  oil and gas properties?

2)  Auto/truck trade-ins?  Low tax basis when prior tax depreciation; not for a personal auto.

Swaps of professional athlete contracts?

Partnership interest swaps?

See limits in §1031(a)(2).  Liquid securities and inventory are not eligible.  Coins?  Rare coins?

Revenue Ruling 79-143
p. 283

Swap of (1) U.S. gold coins (numismatic value, i.e., collectors trade coins) for

(2) Krugerrands (gold content value, i.e., price of gold per ounce). Similar for Canadian gold coins?

Not like kind property for §1031 purposes – since different types of investments.

Note §1031(e) re opposite sex livestock - breeding cows (or milk) vs. steers (meat) not being like-kind property for income tax purposes.

Jordan Marsh Co.
p. 285

Conveyance of real properties for $2.3 million cash and a lease-back of the properties from the transferee for a term of 30 years and 3 days.

See Reg. §1.1031(a)-1(c) re real estate & 30+ year lease being treated as “like kind” property.

Taxpayers claiming sale & loss but IRS asserts like kind exchange, but cash as basis recovery.

Did taxpayer change its position (1st wanting to postpone loss) & make a tax planning mistake?

Transaction enabling a deduction of land cost?

Like Kind Exchange with No “Boot” Received

Example 1:  Client owns property A.  Exchange of Property A worth 10x, basis 4x, for like-kind property B, also fmv 10x.

GI inclusion of 6x realized gain is postponed.

Client’s tax basis for the replacement property is 4x (to preserve the income tax potential on the 6x deferred gain).  §1031(d).

Like Kind Exchange with “Boot” Received  §1031(b)

Example 2:  Client transfers Property A worth 10x (basis 4x, accrued gain 6x) for like-kind property B, fmv 8x, plus 2x cash received (“boot”) by Client from Property A “buyer.”

§1031(b) - 6x gain is realized.  Gain is to be recognized to the extent of the 2x “boot.”

Client’s tax basis for the replacement Property B (fmv 8x) is 4x (to preserve 4x deferred gain). 

Tax basis for 2x cash received is (obviously) 2x.

Like Kind Exchange with “Boot” Received

Example 3:  Client transfers Property A worth 10x (basis 4x, accrued gain 6x) for like-kind property B, fmv 3x, plus 7x cash received (“boot”) by transferor.

§1031(b) - 6x gain (not the 7x cash amount) is realized and to be recognized.

Tax basis for the replacement Property B is 3x (fmv).  All gain has been recognized.

Tax basis for 7x cash received is (obviously) 7x.

Loss - Like Kind Exchange Provision is Not Elective

Example 4:  Client transfers Property A worth 10x (basis 12x, accrued loss 2x) for like-kind property B, fmv 10x (same fmv as Prop. A).

No loss can be recognized. §1031(a).

Tax basis for the replacement Property B is 12x - the 2x potential loss is retained in the replacement property for possible future loss recognition upon disposition, unless subsequent appreciation of replacement property occurs.  

Loss - Like Kind Exchange Provision is Not Elective

Example 5 (boot received):  Transfer of Property A worth 10x (basis 12x, accrued loss 2x) for (1) like-kind property B, fmv 8x and (2) 2x cash boot received by the “seller.”

No loss can be recognized. §1031(a) .

Tax basis for the replacement Property B is 10x (the 12x basis of the transferred property, as reduced by the 2x cash); the 2x potential loss is retained in the replacement property (10x basis & 8x fmv);  2x tax basis for the 2x cash received.

Like Kind Exchange with “Boot” Received in Kind

Example 6:  Client transfers Property A worth 10x (basis 4x, accrued gain 6x) for (1) like-kind property B, fmv 8x, plus (2) other property (e.g., listed stock) worth 2x.

§1031(b) - 6x gain is realized; recognition only to the extent of the boot (i.e., other property).

Tax basis for the replacement Property B is 4x (& remaining 4x gain potential).  Tax basis for the other property is 2x (fair market value).

Like Kind Exchange & Taxpayer Adds Cash Boot

Example 7:  Client transfers (1) Property A worth 10x (basis 4x, accrued gain 6x) and (2) 5x cash for replacement property B with a 15x fmv.

§1031(a) - 6x gain is realized; no gain recognition is required for Client.

Tax basis for the replacement Property B (fmv 15x) is 9x (4x old basis plus 5x new cash paid to other party in exchange transaction).  Transferor to Client may/may not have gain.

Involuntary Conversion Gains  &  §1033 Deferral

P.288. Postponement of realized gain occurs if:

1) A gain is derived from an involuntary conversion, e.g., theft, casualty, seizure, or eminent domain (or a taking “threat”?).

Consider:  proceeds received from insurance.

2)  An acquisition occurs within the required time period (before the close of the 2nd taxable year of gain) of a replacement property “similar or related in service or use.”  Cf., the more expansive §1031 “like kind” property concept. 

§1033 Example:  Business Property Destroyed

Building destroyed by fire is business property.

Taxpayer receives 350x insurance proceeds;  200x tax basis for the old property, and 325x reinvestment is made in replacement property.

Under §1033(a)(2)(A) the 150x of realized gain is included in GI only to the extent of 25x (350x insurance proceeds less the 325x reinvestment). 

The 125x of unrecognized gain reduces the tax basis for the replacement property to 200x.  Unrecognized gain is preserved for future income inclusion with this tax basis adjustment.

Principal Residence Sale

Prior §1034  enabling gain postponement when reinvestment (of a sufficient amount) in a replacement principal residence.  No $ limit.

Gain recognized if sales proceeds exceeded cost of the new principal residence. Basis adjustment for the untaxed gain in the prior residence.

Replacement:  §121 enables a 250x GI exclusion (500x for joint return) on a principal residence sale.  Gain is realized, e.g., when older people downsize their residences; recognition is limited.

Wash Loss Sales Rule

What is a “wash loss”?

§1091 precludes loss recognition when

1) a disposition of stock or securities occurs at

a loss, and

2) an acquisition of “substantially identical stock or securities” is made within a 61 day period (i.e., first sale date and (1) back 30 days and (2) forward 30 days).   Why 61 days?

What is “substantially identical stock”?

Corporate Transactions Nonrecog. Rules       p.291

Note §1001(c).  Cf., §1031.  Examples:

Organization of a corporation and infusion of appreciated assets in exchange for stock.

      See next slide.

Reorganization - Acquisition of stock or assets of one corporation in exchange for stock of the acquirer.

Neither transaction fits within §1031 provisions.

But, other statutory relief is provided here.

Corporate Transactions Nonrecog. Rules       p.291

Consider the formation of a corporation (i.e., a separate taxable entity):

Transfer occurs of appreciated assets into a

corporation in exchange for stock of the corp.

Is gain recognition required?  No - §351.

2)  §1032 – corp. does not recognize gain on issuance of its shares for shareholder’s assets.

3)  What about multiple individuals contributing various assets (e.g., traded shares) into a corporate investment fund?                cont.

Corporate Transaction Nonrecog. Rules      cont.

4) What tax basis to the shareholder for the stock received? See §358 re substituted basis.

What tax basis to the corporation for the

assets received from the shareholder?  §362(a) .

Consider effect of two levels of gain potential.

6) Property subject to debt is transferred to corporation in §351 transaction.  See §357(c) for gain recognized when liabilities exceed tax basis. 

7)  What if services are rendered to the corp. in exchange for shares?  Percentage limit?

Tax-free Corporate Reorganizations       p.292

Change place of corp. organization from

Texas to Delaware.  Why? How? Taxable?

Nonrecognition occurs and a substituted income tax basis applies for the replacement shares.

2)  What if a merger occurs of A corp into existing B corp and the A shareholders receive some shares of B Corp.?  Is gain recognition required of the A shareholders on this exchange?  Not if the exchange occurs in a “tax-free reorganization.”   See §§354 and 368.

Deferred and Contingent Payment Sales      p.293

Patton Trust – “open transaction” treatment is sought by the taxpayer.  (1) Did the promissory note received have an ascertainable value?

(2) If yes, was it an installment note?

Here:  Transfer of stock was made in exchange for the promise to pay in amounts which were dependent upon future cash flow of the buyer.

Held: Sale was not inherently speculative.

“Open transaction” treatment is not available.


Open Transaction Treatment             

Is available only in “rare and extraordinary circumstances.”  Reg. §1.1001-1(a).


To postpone any current inclusion in gross

income (until full basis recovery).

2)  All further proceeds are treated as capital gains while the transaction is “open.”  No receipts are considered as being interest (ordinary) income.

Open Transaction Rule Burnet v. Logan        p.299

Transfer of corporate shares in exchange for (1) cash and (2) a promise of future payments (iron ore royalties).  Was the promise (i.e., contract) to be currently valued (at discounted cash flow) and an amount treated as received by owner?

IRS claims a “closed transaction,” with income tax basis to be recovered in the future.

Held:  Open (not closed) transaction treatment;  no current value for the promise of future payments.  Entitled to return of all capital first.

Next slide for facts.



Open Transaction Rule Burnet v. Logan        p.299

Facts:  Tax basis for shares was $180,000.

Received (a) $120,000 cash and (b) right to future payments based on royalties.

IRS says right to royalties worth $100,000 (25 years at $9,000 per year, discounted to current value). Gain of $40,000 (220 less 180 basis)?

Court says recover the $180,000 tax basis first: 

the $120,000  cash plus early year payments of $60,000 until $180,000 total is received.  Then, capital gain (& no part as interest income).

Deferred Payment    P.299 Transactions - Choices     

Possible approaches to the timing of gain recognition when a promise/contract is received:

1)  Open transaction – all payments are tax basis recovery until the entire basis is received.

Value the stream of expected payments as of

date of sale. Compare this amount with basis.

Closed transaction status exists immediately.

3)  Open transaction, but allocate basis to each expected payment (i.e., an installment method).


Installment Method
§§453, 453A, 453B   p.299

Objective:  Coordinate income tax reporting with the taxpayer’s actual receipt of cash.

Assume no OID or unstated interest (§483).

What is the ratio of (1) gain to (2) the total expected payments? Apply that ratio to each payment to determine the amount of gain embedded in each payment.  §453(c).

Alternative:  Elect out of §453 treatment for “closed transaction” treatment, unless (unlikely) possible open transaction treatment is available. 

Sales with Contingent Payments                 p.300

What if the amount of the payments is actually contingent?  Compare Burnet v. Logan.

Apply §453 in this order:
1) Allocate income tax basis over the maximum amount to be paid.

2) Allocate income tax basis over the maximum payment period.

3) Allocate income tax basis in equal annual amounts over a 15 year period.

Limitations on Installment Sales Eligibility  p.299

See §§453(b)(2) and (k).  Installment sales treatment is not available for (1) inventory sales or (2) sales of publicly traded securities. 

See §453A – an interest charge on deferred tax is applicable if aggregate obligations from sales of $150,000 plus exceed $5 million (during year).

§453A(d) – a loan is treated as payment if the installment obligation is pledged for bank loan.

§453(i) – no deferral for installment obligation when “recapture of depreciation” income arises.

Additional Limitations on §453 Eligibility        

No §453 eligibility where payment in the sale is made by buyer with (1) demand notes, or (2) publicly traded debt obligations.  §453(f)(4).

But, no limitation is applicable where:

the debt is guaranteed, §453(f)(3), or

(2) a bank guarantee with a “standby letter of credit” is provided by the buyer to seller.  Reg. §15a.453-1(b)(3)(iii)

Second Disposition by Related Person       p.301

§453(e)  re:  (1) 1st disposition of property is to a “related person,” and,  (2) 2nd disposition is by the “related person” to another person before all installments are paid on the 1st disposition. 

The 1st disposition is treated as closed when the related person sells in the 2nd disposition.

E.g., 1st sale on installment basis to related person and 2nd sale for cash,  related person can then hold cash pending installment payments with tax deferral to the 1st seller;  but, §453(e).

Planning Around §453(e)

How avoid this “second disposition by related person” rule of  §453(e)?  Transfer to a person other than a “related person”?

Who is a “related person”?  See §453(f) re cross-reference to §318(a) or §267(b) related party definitions.

Does not include a nephew or niece.

What about a same-sex marriage relationship and import in this context?


Capital Gains            p.301
& Chapters 19 and 20

To have a capital gain a disposition of a “capital asset” is required.  Inventory is not a capital asset.  A preferred tax rate (20%) on capital gains applies because:

Gain accrues over multiple years.

To avoid a “lock-in” effect on ownership.

Only inflation (not real economic) gains (?).

Gain comes from capitalization rate changes.

Cf., currently a 19.6%+ tax rate differential vs. the ordinary income rate.


Effect of Inflation in the Income Tax Context p.304

Bracket creep

2)   Income mismeasurement


Objective of inflation indexation of tax rates, allowances, etc.?  To enable the same economic burden & distributional effects after adjustments for the effect of inflation.

Tax Consumption?   p.305
Alternative Tax System?

Allow an immediate deduction for all business and investment expenses, including savings deposited in banks and savings accounts. Result: zero basis for assets and, therefore, income inclusion when the asset is withdrawn from investment and savings.

Benefit for the rich/savers?

Consider the current quasi consumption/income tax system:  a deduction is available for contributions into qualified retirement plans.

Consumption Taxes
p. 306

Retail sales taxes (at state level in U.S.) –

Impact on consumption?   Exceptions in these tax systems for essentials, e.g., food & medical? 

Regressive impact of a retail sales tax?

Cf., national level value-added taxes (VAT) collected at various stages of production. Consider the situation in other OECD countries.  Politically possible in the United States to enact a VAT tax?   Use other terminology?