Friday, November 15, 2013
Alvin Warren (Harvard) presented Understanding Income Tax Deferral and Deferral and Exemption of the Income of Foreign Subsidiaries: A Review of the Basic Analytics at Columbia yesterday as part of its Tax Policy Colloquium Series hosted by Alex Raskolnikov, David Schizer, and Wojciech Kopczuk:
Understanding Income Tax Deferral
The goal of this brief note is to clarify the role of deferral in income taxation by introducing a distinction between pure deferral and counterparty deferral. Pure deferral (such as a current deduction for a capital expenditure) is equivalent to an interest-free loan from the government and, under certain assumptions, to a tax exemption for investment income. Counterparty deferral (such as qualified or nonqualified deferred compensation) shifts taxation of investment income to another party or account, so the advantage depends on the counterparty’s tax rate. Failure to understand the two types of deferral can lead to erroneous conclusions. For example, it is sometimes said that capital gain property will suffer a tax disadvantage if placed in a qualified retirement account because the gain will be subject to full ordinary rates on withdrawal. Similarly, deferral of the employer’s deduction is often said to offset the benefit of deferring an employee’s inclusion of nonqualified deferred compensation. The note demonstrates that both of these statements are erroneous under standard assumptions.
Deferral and Exemption of the Income of Foreign Subsidiaries: A Review of the Basic Analytics
In this note, he reviews the basic analytics of deferral and exemption systems for taxing the income of foreign corporate subsidiaries, highlighting some relationships that are not always fully appreciated in policy discussions.