A Tale of Four Treatments: Preferential Taxation and Asset Valuation

Abstract

Conventional wisdom is that preferential taxation of property income elevates asset values above their values in the absence of a tax, with those values strictly increasing in the marginal rate of the holder. I show that preferential tax rates (such as the rate on realized long-term capital gains) do indeed have that property. Preferential timing on the other hand -- pure "tax deferral" -- does not. The value of an asset subject to pure deferral does increase with the holder’s marginal rate, but only up to a point, at some marginal rate in excess of 50 percent. With increases in the marginal rate beyond that point, the value of the asset declines, approaching its value in the absence of a tax as the marginal rate approaches 100 percent. Disadvantageous timing has exactly the opposite effect. As far as I can tell these properties have not hitherto been noticed.

Keywords: tax deferral, preferential taxation, taxation and valuation, tax timing, capital income taxation, tax incentives

JEL Classification: D80, G11, H20, H21, H24, H25, K34