IMITATING ACCRUAL TAXATION ON A REALIZATION BASIS

Abstract.  While taxation of capital gains upon accrual poses problems of liquidity and valuation, taxation upon realization evokes the so-called lock-in effect that possibly induces distortions of the investors' liquidation and investment decision. The tax schemes, proposed in the literature in order to remedy simultaneously the shortcomings of both taxation methods, are mostly based on the idea of imitating accrual taxation on a realization basis. The paper surveys these proposals of so-called formulaic taxation and develops a uniform formal way of describing the suggested schemes that allows them to be easily compared and evaluated from a theoretic point of view.