Revenue – primary goal



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Loans – not included in gross income under §61 – income only if borrowed amount is not repaid.




    • Under Haig-Simons, only accretions to wealth count. Receiving a loan at same time as obligation to pay it back is not an accretion.

      • No deduction for principal, so loan is repaid with after-tax funds. So loan proceeds are taxed on a deferred basis – when the repayment amounts are earned by the taxpayer-borrower.

      • When loan proceeds are used for consumption:

        • Postponement effectively reduces the tax rate.

        • Example: 30% tax bracket has $100 of consumption today with borrowed funds. Repaid in five years. $30 tax on consumption has present value of $18.63 at 10% discount rate.

      • When loan proceeds are used for investment:

        • Borrowings are included in taxpayer’s basis in property, on which depreciation deductions are allowed. Taxpayers can basically deduct costs that have not yet been incurred.

        • Example: Borrow $100, full purchase price of building, ten year term. On acquisition, $100 is price and can be used to claim annual depreciation deduction starting in the first year. Significant time-value advantage.



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