INTRODUCTION TO TAXATION This rese

This research reviews Introduction to Taxation by Steven Rice. The orientation of this review is the relevance of the material in the text to professional work as a corporate accountant. The focus of this review is on the distortionary effects of inflation on corporate taxation, and the ways in which the interactions between inflation and taxation affect corporate accounting.

The essence of the rationale underlying the contention that inflation exerts meaningful effects on taxes lies in the differentiation between nominal and real values (Rice, 2/212/23). An easily understood illustration of the effects of this differentiation in an inflationary environment with respect to taxes involves a capital gain. As an example, if an asset were acquired for $100 in year one, and if that asset were sold in year ten for $900, a nominal capital gain of $800 has been realized. If, over that same 10 year time period, however, a 100 percent price inflation has occurred in the economy, the $900 received in year ten had a purchasing power of only $450 in year one dollars. The real capital gain in year one dollars, therefore, was $350, as opposed to the nominal capital gain of $800 in year ten dollars. An alternative method of determining the amount of the real capital gain in this example involves the revaluation of the acquisition price into year ten dollars. In this instance, the acquisition price would be adjusted to $200, and the real capi

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ent of the loan principal ($5263.16x.95=$5,000). Thus, the nominal interest income would amount to only $4,737, and the real interest income would amount to only $4,500 ($4,736.84x.95=$5,000). Assuming that a 35 percent tax rate is applied to the $10,000 nominal interest income, the tax on the interest income would be $3,500. If the real interest income were assumed to be $9,500, the effective tax rate on the real interest income would be 36.8 percent, as opposed to 35 percent. If this contention is accepted, however, real interest income is only $4,500, and the effective tax rate is 77.8 percent on real interest income. As was pointed out in the discussion of the rationale underlying the contention that inflation distorts taxes, however, the taxes paid on the nominal interest income are paid in depreciated dollars. Thus, the $3,500 tax payment is worth only $3,325 in beginning of the loan dollars. When the deflated value of the tax payment is considered, there is no distortion on the tax rate of a real interest income of $9,500. When the above contention is accepted, however, the inflationary distortion remains huge, with an effective tax rate on real interest income of 73.9 percent ($3,325/$4,500). Lenders, of course, a
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Some common words found in the essay are:
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Approximate Word count = 2753
Approximate Pages = 11 (250 words per page)