Capital Equipment Expensing: Incremental Tax Reform for a Transition Realization-Based Income Tax

Abstract

Three years ago, I published an article that characterized the U.S. income tax as a specialized variant of a true income tax and dubbed it a “realization-based income tax” (RBIT). It analyzed then current cost recovery theory and policy with respect to equipment. The earlier article argued that normative cost recovery policy for a tax on capital income in a RBIT should exhibit two financial features: first, it should provide for the complete financial recovery of all capital invested in equipment; and second, it should financially measure any realized income produced by the investment in the equipment accurately. The earlier article evaluated three prototypical cost recovery approaches, and concluded that only immediate expensing produced financial characteristics consistent with those features of a normative realization-based income tax when applied to equipment purchases financed exclusively with “tax capital.”