Document Type

Article

Publication Title

University of Chicago Law Review

Abstract

A number of provisions of the Internal Revenue Code deny deductions from gross income that would otherwise be allowable under tax accounting rules, in order to counteract related exclusions or deferrals of income by the taxpayer. For example, § 265 disallows interest deductions on debt incurred or continued in order to purchase or carry tax-exempt bonds. Similarly, schedular provisions such as the capital loss limitation and passive loss rules allow a particular category or "basket" of losses to be deducted only against income from the same basket, largely on the ground that other income from the basket may have been undermeasured by the tax system. These kinds of provisions, which may be called selective limitations on tax benefits, create disparities among taxpayers, denying some income exclusion or deferral they would otherwise receive by specifically disallowing certain deductions. In this article I will argue that selective limitations cannot intelligibly be analyzed solely through the consideration of first-best tax principles, particularly the Haig-Simons definition of income. (Haig-Simons holds that income equals the fair market value of the taxpayer's consumption and change in net worth during the relevant accounting period.) Ultimately, selective limitations raise the question what effect the incorrect treatment (from a Haig- Simons perspective) of one item should have on any other items; do two wrongs make a right? This question gives rise to second-best issues that have a discernible theoretical structure with identifiable tradeoffs, but are indeterminate in the absence of empirical information.

First Page

1189

DOI

https://doi.org/10.2307/1599673

Volume

56

Publication Date

1989

Download

Share

COinS