TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, September 28, 2010

Benshalom Presents Realization and Progressivity Today at Toronto

Benshalom Ilan Benshalom (Hebrew University of Jerusalem, Faculty of Law) presents Realization and Progressivity of the Ideal Tax Base: A Normative Defense for the Achilles Heel of the Income Tax (with Kendra Stead (J.D. 2010, Northwestern)) at the University of Toronto today as part of the James Hausman Tax Law and Policy Workshop Series. Here is the abstract:

The realization requirement, under which taxes are only imposed when an asset is sold and not when it merely appreciates, is the income tax’s original sin. It is long-standing, yet widely considered the main source of tax complexity, inequity, and economic distortion. Despite its problems, realization is considered a basic and indispensible element of modern income tax regimes. It is explained early in most federal income tax courses as necessitated by problems of asset valuation and taxpayer liquidity. To the dismay of certain professors, this explanation usually generates little class discussion. More worrisome, it is also widely accepted outside the classroom—prompting few political objections or normative academic inquiries.

The goal of this presentation is to provide a normative framework to allow policymakers to better understand the role of the realization requirement. It makes two related arguments. First, with respect to certain emotionally non-fungible (personal) assets, realization is normatively justified because the market price is not a good indication of their value to their owners. Second, contrary to the traditional view of realization as a regressive element, taxing only these personal assets upon realization would promote income tax base progressivity. The key point is that personal assets represent a larger portion of the wealth of low- and, even more so, medium-income taxpayers than of the wealthy.

Our approach provides a heretofore absent basis for developing a more effective and coherent policy with respect to realization. This analysis contributes to the broader tax reform debate and opens a novel theoretical inquiry with respect to the distributive impact of different types of errors.

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1. Are there constitutional barriers to taxing unrealized increase in, say, stock value as current year income?

2. Why hasn't Warren Buffet campaigned for this new tax? Because he hasn't yet devised a plan to dodge it, as he has for the estate tax?

Posted by: AMTbuff | Sep 28, 2010 12:32:04 PM

Caught me by surprise there, AMTbuff.

Neither my recollection of the news nor a quick Google search indicated that Warren Buffet has done anything about estate tax planning other than to give to charity. Giving to charity instead of to one's own children is a significant point of having an unlimited charitable deduction, and, assuming you are going to have an estate tax, then I think it is a good policy for charitable deduction to be allowed.

AMTbuff, do you have any further information to bring to the table concerning Warren Buffet's alleged estate tax planning?

Posted by: JeffreyK | Sep 29, 2010 2:06:39 PM

Giving to a charitable foundation that you have had a significant role in designing is different that giving to a long-established charity. The tax rules ignore this difference.

Besides that, if one believes that the government is a good steward of tax revenue, the rationale for an unlimited charitable deduction is weak. Under the income tax, the charitable deduction is limited. A similar limitation for the estate tax would make sense to me.

Posted by: AMTbuff | Sep 29, 2010 5:31:42 PM