A Tale of Four Treatments: Preferential Taxation and Asset Valuation

46 Pages Posted: 30 Aug 2013  

Theodore S. Sims

Boston University School of Law

Date Written: July 27, 2013

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

Suggested Citation

Sims, Theodore S., A Tale of Four Treatments: Preferential Taxation and Asset Valuation (July 27, 2013). Boston Univ. School of Law, Law and Economics Research Paper No. 13-42. Available at SSRN: https://ssrn.com/abstract=2317354 or http://dx.doi.org/10.2139/ssrn.2317354

Theodore S. Sims (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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