Thursday, October 28, 2004
This paper considers the appropriate accounting period for collection of taxes. The focus is on Haig Simons taxation of capital income, although it will also discuss taxation of labor income taxation, consumption taxation, and issues related to realization. The central observation is that discrete taxable periods allow taxpayers to pay taxes after the relevant accretion in value. This deferral of taxes reduces the present value cost of taxation, reducing the effective tax rate. As the end of the taxable period gets closer, the benefit of the deferral goes down and the effective tax rate goes up. The longer the period, the greater the deviations in effective tax rates during the period. Only continuous taxation, determining values and paying taxes at each instant, produces uniform effective tax rates.