A Comprehensive Attack on Tax Deferral

This article explores the operation of T ARET and demonstrates that it produces economic neutrality and fairness among taxpayers, while simplifying the tax system by eliminating the need for provisions designed to reduce deferral advantages or ameliorate the inequities created by the realization-event rule. Finally, even if one decides that TARET should not be implemented, considering its operation provides a useful and quite different perspective on tax policy and taxing issues. In Simons’ words, exploring the T ARET model allows us “to consider fruitfully the problem of bettering the system of presumptions.”

Part I establishes the foundation for the time-adjustment component in TARET by explaining tax deferral through examples and analogies. Part II sets forth TARET and shows how it achieves the goals of economic neutrality, fairness, and administrability. Section Il.A.l.a, dealing with nonexhaustible assets used in business or investment ventures, presents the core concepts of the model; further refinements are provided in discussions of assets that the taxpayer exhausts, produces, or devotes to consumption. Section II.D extends the TARET approach to debt, and includes an: extended discussion of the controversy concerning the proper treatment of future costs. The final section of Part II summarizes the model and its operational implications. Part III continues the evaluation of the TARET model by comparing it to the “consumption tax” approach, which has gained political attention in recent years as a viable and desirable alternative to the present unwieldy tax regime. The purpose of this Part is to begin the debate about whether TARET or the consumption tax best achieves the tax goals of economic neutrality, fairness, and administrability. The conclusion emphasizes certain issues, regarding adjustments to exclude general price-level changes from the tax base and the transition rules necessary to move from the realization-event model to TARET, that must still be explored before TARET can become a serious alternative to the present tax structure.