2010 Reviews

The Timing of Income Recognition in Tax Law and the Time Value of Money, by Moshe Shekel

Jensen, Erik M.

American income-tax law, it has often been said, boils down to two big questions: character and timing. Do away with capital gains preferences and limitations on the utility of capital losses, and the numbingly complex Internal Revenue Code provisions aimed at preventing manipulation of character rules could disappear. Doing so might not be a good idea for other reasons—even if there were no capital gains preference, it might still be desirable to have rules disfavoring recognition of capital losses—but one unquestionable benefit of jettisoning the whole structure would be simplification.

In contrast, it’s impossible to imagine how timing issues can ever disappear from an income-tax system. Obviously they should be minimized—all contentious issues should be minimized—but questions about when income should be recognized and when deductions should be permitted will be with us until the end of time. And here too simplification could come at a cost. The tension between the desire for technical precision in timing rules and the desire for simplification of the tax law can’t be eliminated: simpler tax laws almost inevitably mean that more abuses will be tolerated.