Realization and Progressivity
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How to Cite

Benshalom, I. (2012). Realization and Progressivity. Columbia Journal of Tax Law, 3(1), 43–85. https://doi.org/10.7916/cjtl.v3i1.2807

Abstract

The realization requirement is the income tax’s original sin. Although long-standing, it is widely considered the main source of tax complexity, inequity, and economic distortion. Despite these problems, realization is also considered a fundamental element of modern income tax regimes. It is explained early in most federal income tax courses as necessitated by problems of asset valuation and taxpayer liquidity. To the dismay of certain professors, this explanation usually generates little class discussion. More worrisome, it is also widely accepted outside the classroom—prompting few political objections or normative academic inquiries.

The goal of this article is to provide a normative framework that allows policymakers to better understand the role of the realization requirement. It makes two related arguments. First, with respect to certain emotionally non-fungible (personal) assets, the realization requirement is normatively justified because the market price is not a good indication of the assets’ value to their owners. Second, contrary to the traditional view of realization as a regressive element, taxing only these personal assets upon realization would promote income tax progressivity. This article’s normative approach provides a basis for developing a more effective and coherent redistributive income tax policy. This analysis contributes to the broader tax reform debate and opens a novel theoretical inquiry with respect to the distributive impact of different types of errors.

https://doi.org/10.7916/cjtl.v3i1.2807
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