Fixing Capital Gains: Symmetry, Consistency and Correctness in the Taxation of Financial Instruments / David F. Bradford.

By:

Bradford, David F

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5754.Publication details: Cambridge, Mass. National Bureau of Economic Research 1996.Description: 1 online resource: illustrations (black and white)Subject(s):

H24 - Personal Income and Other Nonbusiness Taxes and Subsidies

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: A great deal of effort and ingenuity has been addressed to patching holes in the income tax attributable to realization accounting. A classic instance of the problem is the headachescreated by capital gains, whereby the taxpayer can choose to postpone recognition of gain and accelerate recognition of loss (known as cherry picking). The inconsistencies resulting from realization accounting are most pronounced than in the taxation of financial instruments, especially requirements for income measurement rules based on realization that are `linear' in the sense that doubling a person's transactions will double the taxable income, and adding one set of transactions to another will result in the sum of the associated income. Under present realization conventions, the tax law cannot be linear because there would then be no limit on tax arbitrage profit via variations on borrowing with deductible interest and lending tax exempt. To focus on the principles, the paper assumes transactions are costless. In that case, it is shown that to deal with the intertemporal aspect requires virtually universal imputation of taxable interest income to basis. To deal with the risk aspect of the problem (lock-in and cherry picking) requires simply that the effective rate of tax on gains and losses be the same (not necessarily equal to the rate on intertemporal returns). A new method is proposed that satisfies the requirements for linear income measurement. It is shown that the retroactive taxation of gain devised by Alan Auerbach is a special case of the new approach (involving a zero effective rate of tax on gains and losses).

Tags from this library: No tags from this library for this title. Log in to add tags.

Average rating: 0.0 (0 votes)

Holdings
Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5754 (Browse shelf(Opens below))	Not For Loan

Total holds: 0

Collection: Colección NBER Close shelf browser (Hides shelf browser)

Previous	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	No cover image available	Next
Previous	nber w5751 The Determinants of Technological Change in Heart Attack Treatment /	nber w5752 Heterogeneous Information Arrivals and Return Volatility Dynamics: Uncovering the Long-Run in High Frequency Returns /	nber w5753 The Government as Venture Capitalist: The Long-Run Effects of the SBIR Program /	nber w5754 Fixing Capital Gains: Symmetry, Consistency and Correctness in the Taxation of Financial Instruments /	nber w5755 "Basket" Cases: International Joint Ventures After the Tax Reform Act of 1986 /	nber w5756 The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes /	nber w5757 The Macroeconomics of Specificity /	Next

September 1996.

A great deal of effort and ingenuity has been addressed to patching holes in the income tax attributable to realization accounting. A classic instance of the problem is the headachescreated by capital gains, whereby the taxpayer can choose to postpone recognition of gain and accelerate recognition of loss (known as cherry picking). The inconsistencies resulting from realization accounting are most pronounced than in the taxation of financial instruments, especially requirements for income measurement rules based on realization that are `linear' in the sense that doubling a person's transactions will double the taxable income, and adding one set of transactions to another will result in the sum of the associated income. Under present realization conventions, the tax law cannot be linear because there would then be no limit on tax arbitrage profit via variations on borrowing with deductible interest and lending tax exempt. To focus on the principles, the paper assumes transactions are costless. In that case, it is shown that to deal with the intertemporal aspect requires virtually universal imputation of taxable interest income to basis. To deal with the risk aspect of the problem (lock-in and cherry picking) requires simply that the effective rate of tax on gains and losses be the same (not necessarily equal to the rate on intertemporal returns). A new method is proposed that satisfies the requirements for linear income measurement. It is shown that the retroactive taxation of gain devised by Alan Auerbach is a special case of the new approach (involving a zero effective rate of tax on gains and losses).