Here Today, Gone Tomorrow: Income Taxation of Cash Flow Reversals

Individuals and firms sometimes receive money that they are required to partially or fully repay in a later year. If the initial receipt is subject to income tax, how should the income tax system treat the subsequent repayment? Conversely, individuals and firms sometimes make payments for which they later receive reimbursement (or a refund from the initial recipient). If the initial outlay is deductible under the income tax, how should the income tax system treat the subsequent reimbursement? Both situations, which can generally be analyzed symmetrically, involve cash flows that are later reversed.

It seems plausible that the income tax system should account for the cash fl ow reversal in some manner. An additional question arises, however, if the taxpayer’s marginal income tax rate changes between the time of the initial cash flow and the time of its reversal. Should the adjustment for the cash flow reversal then be based on the reversal year's tax rate or the tax rate at which the initial cash flow was recognized?

Click here to view this document as an Adobe Acrobat PDF.

Alan D. Viard is a resident scholar at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

What's new on AEI

image The Pentagon’s illusion of choice: Hagel’s 2 options are really 1
image Wild about Larry
image Primary care as affordable luxury
image Solving the chicken-or-egg job problem
AEI on Facebook
Events Calendar
  • 05
    MON
  • 06
    TUE
  • 07
    WED
  • 08
    THU
  • 09
    FRI
Tuesday, August 06, 2013 | 12:00 p.m. – 1:30 p.m.
Uniting universal coverage and personal choice: A new direction for health reform

Join some of the authors, along with notable health scholars from the left and right, for the release of “Best of Both Worlds: Uniting Universal Coverage and Personal Choice in Health Care,” and a new debate over the priorities and policies that will most effectively reform health care.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.