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Theory Meets Reality: The Case of the Double Tax on Material Capital

52 Pages Posted: 18 Oct 2007  

William Turnier

University of North Carolina School of Law


In recent years there has been increased interest in the adoption of a consumption tax as a replacement for the income tax. Typically it is suggested that this result be achieved by (1) taxing only wage income, (2) providing a deduction for all investments in material capital, (3) providing an exemption for all investment income, or (4) providing an excise tax on consumption purchases. One of the leading theoretical justifications for making such a radical change in our tax laws has been an embrace of John Stuart Mill's observation that whereas income from capital is taxed twice, once as earned and again as the income from capital is taxed, income from labor is taxed only once, as it is earned. In this article the author conducts an examination of the relative taxation of labor (human capital) and material capital under the Internal Revenue Code (Code) to determine which of these two forms of capital is taxed more advantageously. Measured against the Haig-Simons definition of income and the ideal taxation of income from material and human capital that would be dictated by Haig-Simons, the author demonstrates that, under the Code, the income from neither form of capital is advantaged over the other. The article demonstrates why it is important for analysts to measure their theoretical conclusions regarding laws against the actual laws themselves and not against an artificial construct of the theoretician.

Suggested Citation

Turnier, William, Theory Meets Reality: The Case of the Double Tax on Material Capital. Virginia Tax Review, Forthcoming; UNC Legal Studies Research Paper No. 1022022. Available at SSRN:

William J. Turnier (Contact Author)

University of North Carolina School of Law ( email )

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Chapel Hill, NC 27599-3380
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