End Tax Floats by Taxing Receivables or Deferring Payables

14 Pages Posted: 30 May 2012

See all articles by Calvin H. Johnson

Calvin H. Johnson

University of Texas at Austin - School of Law

Gregg D. Polsky

University of Georgia School of Law

Date Written: December 13, 2010

Abstract

Current law allows businesses that sell services or receive rents or royalties to pay tax on the receivables only when they are collected. Exclusion of receivables under current law allows β€˜β€˜tax floats,’’ under which the customer or client immediately deducts the liability but the recipient does not simultaneously include the liability in income. Tax floats make government revenue fall between the cracks and give a welfare-like subsidy to transactions with no special merit. Receivables can be replicated every year, so they are best viewed as a continuous pool or river, with the tax float continuing until the end of the business. Extending credit to customers is an income-producing investment, and it is possible, as a matter of economics, to tax the profit.

This proposal would end tax floats by taxing the receivables or by deferring the deduction of a payable until it is paid. The proposal generally would include a service, rent, or royalty receivable in income no later than when the bill is sent out. The Shelf Project is a collaboration among tax professionals to develop proposals to raise revenue in the impending revenue crisis by defending the tax base. It is intended to raise revenue without a VAT or a rate increase in ways that will improve the fairness, efficiency, and rationality of the tax system. The hard work needs to be done now to develop viable proposals. Shelf projects are intended to foreclose both 85 percent income tax rates and 60 percent federal sales taxes.

Suggested Citation

Johnson, Calvin Harsha and Polsky, Gregg D., End Tax Floats by Taxing Receivables or Deferring Payables (December 13, 2010). Tax Notes, Vol. 129, p. 1243, December, 2010; The Shelf Project. Available at SSRN: https://ssrn.com/abstract=2070109

Calvin Harsha Johnson (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1306 (Phone)
512-232-2399 (Fax)

Gregg D. Polsky

University of Georgia School of Law ( email )

225 Herty Drive
Athens, GA 30602
United States

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