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Partial Basis Indexation: An Implicit Response to Tax Deferral

100 Pages Posted: 16 Mar 2000  

Mitchell L. Engler

Benjamin N. Cardozo School of Law

Date Written: March 2000


Our current income tax contains two significant deviations from an ideal income tax. First, appreciated assets held beyond a single period are undertaxed since the tax on the appreciation can be deferred until disposition without interest. Second, real economic gains are overtaxed since capital investments in property are not adjusted upwards for inflation. Since the two deviations work in opposite directions, much thoughtful analysis has concluded that any response to the inflation problem should be accompanied by a separate anti-deferral mechanism.

This Article demonstrates, however, that support for partial basis indexation (under which capital investments other than debt would be indexed upwards for inflation) does not require the complication of a separate deferral response. Partial basis indexation imposes an implicit deferral charge, approximating the short-term government rate, on the exact amount of deferred gain. This deferral charge should be reasonably fair in a significant number of circumstances; in addition, even where understated the charge would be a significant improvement over current law. Thus, each of the inflation and deferral deviations independently supports partial basis indexation.

This Article further demonstrates the reciprocity of the implicit interest charge: taxpayers who accelerate taxes by holding loss assets are provided a similar time value compensation. Recognition of this reciprocity allows for significant simplification as well as consideration of supplemental deferral protection on a more limited interval basis.

JEL Classification: K34

Suggested Citation

Engler, Mitchell L., Partial Basis Indexation: An Implicit Response to Tax Deferral (March 2000). Tax Law Review, Spring 2000. Available at SSRN: or

Mitchell Engler (Contact Author)

Benjamin N. Cardozo School of Law ( email )

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New York, NY 10003
United States
(212) 790-0217 (Phone)
(212) 790-0205 (Fax)

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