tions today. A report by the Treasury at that time (Blakey 1934:
Section VIII) noted with regard to the corporate income tax:
The irregularity of income, the taxation of capital gains, the defini
tion of the time of “realization,”the handling of depreciation and
appreciation, the cash versus accrual method of accounting, the
holding and distributing of corporation earnings in the form of
dividends, all raise serious difficulties in the definition of income
and administration of a net income tax.
Income Taxation is Sensitive to Timing
Timing is everything under the income tax, which relies on capi
talization and accrual accounting. The basic idea is to match expenses
against corresponding income when earned. For example, if cash is
spent this year on an asset that creates benefits in future years, the
cost should not be currently deducted. Instead, the cost must be
capitalized and deducted later. The corporate income tax generally
requires that long-lived assets be capitalized. The cost of structures,
machines, and other assets are deducted over time under rules for
depreciation and amortization, and inventory has its own set of com
plex rules. Goodwill, an asset created under some corporate acquisi
tion transactions, is amortized over 15 years. In sum, in any given year
there are numerous income and deduction items on corporate in
come tax returns that do not coincide with flows of cash but are based
on tax law definitions determining the proper timing of recognition.
The corporate income tax generally uses accrual accounting, mean
ing that income is included in the tax base when earned, not when
cash is received, and expenses are deducted when incurred, not when
cash is paid. But capital gains is an exception. In theory, broad-based,
or Haig-Simons, income 本文来自辣%文&论@文^网原文请找腾讯752018766 , the income tax falls back on taxing
most, but not all, gains when realized. Recent tax shelters have ex
ploited the fact that some gains are taxed on a realization basis and
other gains are taxed on a mark-to-market or accrual basis, such as
foreign currency contracts (U.S. Treasury 1999: 16).
A number of Enron tax shelters exploited the income tax’s sensi
tivity to timing. For example,“commodity prepay”deals were set up
to allow Enron to generate up-front income to utilize special energy
tax credits before they expired (JCT 2003a: 346). Enron received
up-front payments to utilize the tax credits, but then the deals were
reversed-out with further transactions after the tax benefits had been
received.Net Cash Flow is an Alternative Tax Base
An alternative to income taxation based on accrual accounting is
consumption taxation based on cash-flow accounting. A cash-flow tax
would be imposed on net cash-flow of businesses, not net income or
profits. The most commonly proposed type of cash-flow tax, an“R
based”tax, would have a tax base of receipts from the sale of goods
and services less current and capital expenses. Under an R (real) base,
financial items such as interest, dividends, and capital gains would be
disregarded—they would not be included in income nor allowed as
deductions. (Alternately, an R+F base, real plus financial, would in
clude financial flows). Under cash-flow accounting, businesses would
include receipts when cash is received, and deduct the full costs of
materials, inventories, equipment, and structures when they are pur
chased.
Most such manipulations with regard to the timing of income and
expenses would be eliminated under a cash-flow tax. Income would
be included in the tax base when received. Deductions would be
taken when cash went out the door. That treatment would not only be
more economically efficient, it would remove a great many tax avoid
ance opportunities that exist under the current tax regime. Most
corporate income tax distortions would be eliminated under a cash
flow tax. These include the different treatment of debt and equity, the
different treatment of corporate and noncorporate businesses, the
bias against saving, and distortions caused by depreciation and infla
tion.
Business cash-flow taxes have formed the basis of numerous legis
lative proposals. The most well known is the flat tax designed by the
Hoover Institution’s Robert Hall and Alvin Rabushka (1995). The flat
tax is based around an R-based business cash-flow tax, and versions
were championed by Dick Armey and others in the 1990s.
Capitalization
Under the income tax, business purchases of assets that generate
revenues in future years are typically not deducted when purchased.
Instead, such items as buildings, machines, and intangible assets are
capitalized and deducted over future years. Under income tax theory,
the purchase price of buildings and machines should be deducted, or
depreciated, over time to match the loss in economic value of the
asset. When intangible assets are purchased, they are amortized over
a specified period. Materials purchased for inventory and related
expenses face special deduction rules.
There are two key problems with capitalization. The first problem
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