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53 Tax L. Rev. 95 (1999-2000)
A Partial Mark-to-Market Tax System

handle is hein.journals/taxlr53 and id is 105 raw text is: A Partial Mark-to-Market Tax System
DAVID A. WEISBACH*
I. INTRODUCTION
Haig-Simons taxation' generally is viewed as the ideal form of in-
come taxation. It is simple, fair, and efficient. All income within the
Haig-Simons system would be taxed at a uniform rate under a single,
simple set of rules. Taxpayers with equal accessions to wealth would
be taxed equally. Avoiding tax by manipulating the form of a transac-
tion would be almost impossible.2 Haig-Simons taxation (which, fol-
lowing current convention, I refer to as mark-to-market taxation),
however, would require taxpayers to value assets prior to and to pay
tax prior to the receipt of cash. These requirements, valuation and
liquidity, are thought to be unreasonable for many assets. Thus, cur-
rent law generally does not require tax to be paid until income is re-
alized, which is generally when the asset producing the income is
sold.3
* Associate Professor, University of Chicago Law School. I thank Steven Cohen,
Joseph Dodge, David Garlock, Dan Halperin, Mark Gergen, Deborah Schenk, the
participants at the Harvard Colloquium for Current Research in Taxation, and the
participants in the Tax Structure and Simplification Committee of the ABA Tax Section for
comments, and Ian O'Donnell for valuable research assistance.
1 In Haig-Simons taxation, a taxpayer's income in each tax period is equal to consump-
tion plus change in wealth for the period. To measure change in wealth, the taxpayer
would value all of his assets and include in income (or deduct from income) the change in
value plus any cash received. Robert M. Haig, The Concept of Income-Economic and
Legal Aspects, in The Federal Income Tax 1 (Robert M. Haig ed., 1921), reprinted in Am.
Econ. Ass'n, Readings in the Economics of Taxation 54 (Richard A. Musgrave & Carl
Shoup eds., 1959); Henry C. Simons, Personal Income Taxation 50 (1938).
2 For example, the problems caused by realization taxation of financial instruments
would be eliminated. For a discussion of problems raised by financial innovation, see
David P. Hariton, The Taxation of Complex Financial Instruments, 43 Tax L Rev. 731
(1988); Edward D. Kleinbard, Equity Derivative Products: Financial Innovation's Newest
Challenge to the Tax System, 69 Tex. L Rev. 1319 (1991); Deborah H. Schenk, Taxation of
Equity Derivatives: A Partial Integration Proposal, 50 Tax L Rev. 571 (1995); Reed
Shuldiner, A General Approach to the Taxation of Financial Instruments, 71 Tex. L Rev.
243 (1992) [hereinafter General Approach]; Jeff Strnad, Taxing New Financial Products. A
Conceptual Framework, 46 Stan. L. Rev. 569 (1994); Alvin C. Warren Jr., Financial Con-
tract Innovation and Income Tax Policy, 107 Harv. L Rev. 460 (1993); David A. Weisbach,
Tax Responses to Financial Contract Innovation, 50 Tax L Rev. 491 (1995).
3 Cottage Say. Ass'n v. Commissioner, 499 U.S. 554 (1991); Eisner v. Macomber, 252
U.S. 189 (1919).
95

Imaged with the Permission of N.Y.U. Tax Law Review

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