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Generalized Cash Flow Taxation

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  • Alan A. Auerbach
  • David F. Bradford

Abstract

We show the unique form that must be taken by a tax system based entirely on realization accounting to implement a uniform capital income tax, or, equivalently, a uniform wealth tax. This system combines elements of an accrual based capital income tax and a traditional cash flow tax, having many of the attributes of the latter while still imposing a tax burden on marginal capital income. Like the traditional cash flow tax, this system may be integrated with a tax on labor income. We also show how such a tax can be supplemented with an optional accounting for a segregated subset of actively traded securities, subjected separately to mark-to-market taxation at the uniform capital income tax rate, to permit a fully graduated tax system applicable to labor income.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8122.

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Date of creation: Feb 2001
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Publication status: published as Auerbach, Alan J. and David F. Bradford. "Generalized Cash-Flow Taxation," Journal of Public Economics, 2004, v88(5,Apr), 957-980.
Handle: RePEc:nbr:nberwo:8122

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  1. William Vickrey, 1939. "Averaging of Income for Income-Tax Purposes," Journal of Political Economy, University of Chicago Press, vol. 47, pages 379.
  2. Alan J. Auerbach, 1991. "Retrospective Capital Gains Taxation," NBER Working Papers 2792, National Bureau of Economic Research, Inc.
  3. Kaplow, Louis, 1996. "On the Divergence between "Ideal" and Conventional Income-Tax Treatment of Human Capital," American Economic Review, American Economic Association, vol. 86(2), pages 347-52, May.
  4. Kaplow, Louis, 1994. "Taxation and Risk Taking: A General Equilibrium Perspective," National Tax Journal, National Tax Association, vol. 47(4), pages 789-98, December.
  5. Louis Kaplow, 1995. "Taxation and Risk Taking: A General Equilibrium Perspective," NBER Working Papers 3709, National Bureau of Economic Research, Inc.
  6. Nielsen, Soren Bo & Sorensen, Peter Birch, 1997. "On the optimality of the Nordic system of dual income taxation," Journal of Public Economics, Elsevier, vol. 63(3), pages 311-329, February.
  7. Kai A. Konrad, 1991. "Risk Taking and Taxation in Complete Capital Markets," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 16(2), pages 167-177, December.
  8. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  9. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
  10. Paul A. Samuelson, 1964. "Tax Deductibility of Economic Depreciation to Insure Invariant Valuations," Journal of Political Economy, University of Chicago Press, vol. 72, pages 604.
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