The Quiet Costs of Taxation: Cash Taxes and Noncash Bases

62 Pages Posted: 2 Aug 2017 Last revised: 30 Oct 2017

See all articles by Andrew T. Hayashi

Andrew T. Hayashi

University of Virginia School of Law

Date Written: July 7, 2017


Tax law gives relief to “illiquid” taxpayers, those with income or wealth but no cash. This relief results in revenue losses, creates opportunities for tax avoidance, and distorts economic decisions. And yet, we don’t know how much hardship is actually created by illiquidity. This Article provides a framework for determining the magnitude of that hardship. The framework reveals that the costs of selling property or borrowing money to pay taxes in cash are not the only costs borne by illiquid taxpayers; they may also have to make painful adjustments in their current consumption or retirement savings plans. These are the “quiet” costs of taxation. I show that illiquidity hardship can be quantified in dollar terms and thereby placed on the same scale as other considerations that go into the evaluation of tax law and policy, allowing it to be weighed in the balance and making it possible to identify the contexts in which it truly matters. I demonstrate that illiquidity hardship is a meaningful concern in the property tax context but is a weak justification for the “realization” requirement under federal income tax law.

Suggested Citation

Hayashi, Andrew T., The Quiet Costs of Taxation: Cash Taxes and Noncash Bases (July 7, 2017). Virginia Law and Economics Research Paper No. 2017-15, Available at SSRN:

Andrew T. Hayashi (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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