INTRODUCTION TO TAXATION: A BOOK REVIEW
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, 2/21 2/23). 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 capital gain in year ten dollars would be $700.
In the foregoing example, one has a choice of three capital gains two real and one nominal. The nominal capital gain is the one recognized by the Internal Revenue Service (IRS); therefore, the tax payer in this example would be required to pay taxes on a capital gain of $800, when the real gain was not that high. Assuming, for purposes of illustration, that the applicable tax rate on the capital gain was 28 per...