Income Tax Accounting Consistency : Eliminate Accrual and Depreciation, and Revamp the Tax Treatment of Borrowing

The thesis is that inconsistent tax accounting rules undermine the individual income tax, and the best available move for improving it – given the unassailability of the realization principle - is to eliminate its accrual (and quasi-accrual) features. Specifically, the agenda is to eliminate tax accrual accounting in the conventional sense, revamp the tax treatment of borrowing to (inter alia) abolish the <em>Crane</em> doctrine, and eliminate depreciation deductions for indivisible productive assets. The end result would be a consistent cash realization system for (at least) individual taxpayers.The proposals made herein would upset long-standing features of the income tax, and therefore are highly controversial. Nevertheless, these features create structural asymmetries that are systematically exploited to the advantage of taxpayers. Part I explains why tax reform should focus on the current realization income tax, rather than ideal systems (such as an accretion income tax or personal consumption tax). Included is a defense of the realization principle on the merits. Part II considers what realization really means in a general sort of way. Part III argues that the accrual method should be abolished. Proposals for revamping the tax treatment of borrowing, including abolition of the <em>Crane</em> doctrine, are the subject of Part IV. The case for abolishing depreciation (with exceptions) is made in Part V, where the Samuelson model of depreciation is shown to be irrelevant to a realization income tax. Collateral changes would include, inter alia, liberalizing the repair doctrine and expensing of indirect production costs. Part VII considers the feasibility of limiting the proposed changes to the individual income tax, and Part VII is the conclusion