Boston University School of Law

 

A Tale of Four Treatments:
Preferential Taxation and Asset Valuation

Theodore S. Sims


Boston University School of Law Working Paper No. 13-42
(August 28, 2013)

Abstract
Conventional wisdom is that preferential taxation of property income elevates the value of assets 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.

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Contact Information

Theodore S. Sims

Boston University School of Law
765 Commonwealth Avenue
Boston, MA 02215

Telephone: 617-353-2797

sims@bu.edu

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