End Tax Subsidy from Abandonments and Swaps

Abstract

In this article, Johnson argues that current law, in providing ordinary loss treatment for capital assets, allows tax planners to exploit rate and timing asymmetries to get a negative tax, or subsidy, for investment bets that lack special social merit. He proposes that Congress eliminate that off-budget subsidy by amending the statutory definition of capital loss to include losses from the disposition or modification of a capital asset. Losses from swaps would also be treated as capital losses.

The proposal is made as a part of the Shelf Project, a collaboration of tax professionals to develop methods for raising revenue in ways that improve the fairness and efficiency of the tax base. Shelf Project proposals are the best way to raise revenue when Congress is ready to do so. Shelf Project proposals imitate committee reports in describing current law, discussing the reasons for change, and explaining the proposal.