Capital Maintenance and the Concept of Income--A Comment

Abstract

W HEN George F. Break's article on capital maintenance first appeared,' one would have expected protests against its major conclusion from other economists. Although purposely limited in scope, his excellent classification of income concepts indicated that income measurements should preferably be made in money rather than in real terms. A correction by E. Cary Brown did appear exactly one year later.2 Disappointingly, it was limited to a gentle joust on a minor point concerning depreciation and indicated Brown's agreement with basic ideas of original paper. Professor Break's conclusions that the best concept, according to these standards, is ex post initial-value capital maintenance, calculated in money terms and on a realization basis and that this is also best concept for tax purposes are all more surprising when one recalls that economists and statisticians in Study Group on Business Income of American Institute of Accountants favored adjustments of money figures to real terms.3 On a priori grounds alone, most economists would be expected to arrive at a definition of income which used real measurements. Several comments and suggestions relating to Break's paper follow. These will lead to a different conclusion, namely, that whenever prices change significantly, some real measure of income is preferable for both income-reporting and tax purposes. The discussion will be confined mainly to income of business enterprises.