Full Nash Implementation of Neutral Social Functions

This paper characterizes neutral social functions that are fully implementable. A necessary condition for full implementation under either the Nash equilibrium concept or the strong Nash equilibrium concept is that the neutral social function being implemented be monotonic and simple. If a neutral monotonic social function is simple and the set of winning coalitions is nondictatorial then the social function is fully implementable by a set of Nash equilibria. For finite alternative sets a neutral monotonic social function will be fully implementable by a set of strong Nash equilibria if and only if it is simple and dictatorial

Choosing a Tax Treatment for New Financial Products

Two desirable properties for a tax system that must specify tax treatments for new financial instruments are consistency and universality. A tax system is universal if the system can designate a tax treatment for any cash flow pattern. Consistency requires that the tax treatment for each cash flow pattern be unique. A third property, linearity, holds if dividing the cash flow into different combinations of securities will not affect the tax treatment. One way to achieve consistency and universality is to construct a tax system with a single systematic pattern of taxation, such as cash flow taxation or accretion taxation. But this extreme degree of homogeneity is not necessary. Consistent and universal tax systems can harbor radically different treatments for different types of transactions. "Bifurcation approaches" divide a new financial instrument into certain prototype transactions with known tax treatments. The tax treatment for the new instrument is the sum of the tax treatments of the prototypes that sum up to the instrument. "Integration approaches" use rules that tax aggregates of instruments within the taxpayer's portfolio. Bifurcation methods have a natural connection to linearity. These methods will not achieve consistency and universality in a nonlinear setting unless they are accompanied by elements of an integration approach. All universal and linear tax systems can be generated by "the spanning method," a specific kind of bifurcation. Spanning method approaches are only a subclass of a broader set of integration approaches that achieve consistency and universality. In evaluating integration approaches, a key property is continuity, the requirement that tax treatments do not jump in response to small changes in any given portfolio. Continuity is a generalization of consistency. The existence of jumps leads to the possibility of serious tax manipulation of the same sort that would arise from inconsistencies. The current U.S. tax system includes some direct inconsistencies. That is, the same transaction can be packaged different ways to achieve different tax results. These inconsistencies can only be eliminated by fundamental reform. Even the most powerful integration approaches cannot address the problem of direct inconsistencies. This fact raises difficulties for authorities such as the Treasury Department and the courts who have only low level reform at their disposal. In promulgating regulations or deciding cases that involve new financial instruments, these authorities must choose rules using a second best approach. Loose ends in the form of inconsistencies or lack of universality are inevitable

Tax Depreciation and Risk

The theoretically ideal tax depreciation rule under an accretion tax is economic depreciation, a stream of deductions that replicates the decline in value of an asset over time. When the future value path of an asset is known in advance, the tax depreciation schedule should be based on the age-price profile for surviving assets. When the future value path of an asset is uncertain, this approach fails. A taxpayer can accelerate the statutory schedule by "strategic loss-taking." A series of special disposition rules (where each rule is combined with an adjustment in the ex ante depreciation schedule) address this problem, but each such rule has particular disadvantages. Finally, strategic loss-taking and rules designed to address it are particularly important in formulating a policy toward group accounting methods of depreciation

The Bankruptcy of Conventional Tax Timing Wisdom is Deeper than Semantics: A Rejoinder to Professors Kaplan and Warren

The Haig-Simons ideal is an important normative concept. But using it requires that one specify a method of measuring the value of changes in wealth. I use market value and present value, the concepts of value employed in modern finance theory. Professors Kaplow and Warren disagree with a result that I show follows from those concepts of value: That the CFIT implements the Haig-Simons ideal in a non-general-equilibrium setting. But their critique is ineffective because they do not present an alternative concept of value and give reasons for using it in the definition of the Haig-Simons ideal instead of market value or present value. It is questionable whether such an alternative concept can be constructed that is also consistent with the idea of value contained in modern finance theory. Professors Kaplow and Warren generally agree with my position that it is important to take general equilibrium effects into account in assessing alternative tax policies. But their attempt to make a general equilibrium argument for the equivalence of the CFIT and yield exemption fails. In fact, using their approach reinforces the conclusion in my original article that the equivalence holds in a non-general-equilibrium setting only for breakeven transactions