ABSTRACT
This chapter provides an overview of costs and benefits of fair value taxation. It also provides two examples of decisions – investment decisions of firms and capital gains realization decisions – that are distorted by historical cost accounting but that are not distorted by fair value accounting. The primary role of the income tax system is to achieve a desired revenue and redistribution level in a way that minimizes the costs of the tax system. Capital gains taxation based on fair value accounting when gains accrue does not distort the timing of capital gains realization decisions. Fair value taxation versus historical cost accounting has also implications for the decision to realize accrued capital gains. Fair values are already used for tax purposes such as company valuation or asset valuation for estate taxes, wealth taxes or inheritance tax purposes. In all countries, taxable corporate income determination follows the accrual principle.
