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Editor: Paul L. Caron, Dean
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Wednesday, October 11, 2017

Johnson: A Conceptual Framework For Capital Gain

Florida Tax Review  (2015)Calvin H. Johnson (Texas), A Conceptual Framework for Capital Gain, 20 Fla. Tax Rev. 664 (2017):

Qualification for preferential tax rates on capital gain is “fuzzy at best and incoherent at worst.” The primary governing statute provides that sale or exchange of “property” yields capital gain, with only narrow exceptions. Under traditional understanding, however, capital gain does not include income, including rent, interest, compensation, and periodic business income, even though such income is received on the sale of something reasonably considered to be “property” in nontax contexts. A conceptual framework is needed that brings both courts and congressional rules into consistency and produces principled results; this Article presents such a framework.

The proposed framework assumes that the capital gain preference will remain. It draws its principles from the wisdom of current law but then criticizes some judicial and congressional results as anomalies inconsistent with those principles. The framework is organized into five strings, with each string representing a separate rationale. The Article then briefly explores three situations where there would no room for a capital gains preference: under a consumption tax, under a mark-to-market system, and under repeal of step up in basis at death.

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If we're going to have an income tax, all income must be taxed the same. If we don't, we'll end up with what economists called the "tax wedge," which is the market inefficiency caused by artificial rules. Humans love games. We have found dice that is thousands of years old. If we create opportunities for humans to game the system, game they will.

Posted by: Dale Spradling | Oct 12, 2017 6:03:02 AM