Reasonable Business Expense - The Chartered Institute of Taxation

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Reasonable Business Expenses: Discussion paperamong taxpayers. Logically, this would imply the taxation of intangiblessuch as leisure time and self-supply imputed income from services. 183However, it proffers no tool to measure with precision such constituentelements of ‘welfare’ inclusive of such individual traits as physical,mental and financial endowments and economic and social opportunities,as well as unique tastes and human capital. Thus, while appealing (atleast to the revenue authorities) in suggesting that the sum of individuals’comprehensive endowments should be brought to tax, it fails to providethe benchmark for measuring this, compelling tax policymakers to resortto other concepts such as ‘income’ to serve as a close substitute. 184Edgar 185 considers the optimal rules relating to the deductibility ofexpenses that may influence the concept of taxable consumption underan ideal personal income tax base. Following the optimal tax tradition,Edgar examines the implications these ‘use of funds’ tax bases suggestfor the development of rules governing the deductibility of expenses. Inthis analysis, the Haig-Simons accretion concept of income 186 based onconsumption and accumulation suggests that the comprehensive tax baseshould be used as a benchmark for taxable income. As regards thedeductibility of expenses, only outlays expended in the income-earningprocess should be deductible, as Haig-Simons income distinguishesbetween the income-earning and profit distribution processes. Asexpenditure incurred to produce income will ultimately be taxed once thatincome is realised, tax should be assessed on a net, as opposed to a183184185186Tim Edgar (1997) The Concept of Taxable Consumption and theDeductibility of Expenses under an Ideal Personal Income Tax Base, in R.Krever ed. Tax Conversations, (Great Britain: Kluwer Law International), p.300.Kevin Holmes, (2000) The Concept of Income: A Multidisciplinary Analysis,IBFD Doctoral Series Vol. 1, IBFD Publications BV, pp. 9 – 14; 30 – 33.Tim Edgar (1997) The Concept of Taxable Consumption and theDeductibility of Expenses under an Ideal Personal Income Tax Base, op cit.Essentially, the algebraic sum of market rights exercised in consumptionand the change in market value of the store of property rights over therelevant period: see Henry Simons (1938), Personal Income Taxation(Chicago: Univ. of Chicago), p. 17. See also, Tim Edgar (1997) The Conceptof Taxable Consumption and the Deductibility of Expenses under an IdealPersonal Income Tax Base, op cit, p. 298.Bode OyetundePage 34 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
Reasonable Business Expenses: Discussion papergross, revenue basis. 187 He suggests the use of social welfare analysis toexamine the distributional and economic consequences of alternativemethods of treating specific revenue and income items under an ability topay concept of tax base formulation. 188Edgar reviews 189 the work of Klein 190 , Halperin 191 and Griffith 192 , who offersignificant insights into the problems of deductibility of mixed purposeexpenses. Griffith’s work examines various rules based on bothinformational requirements and distributional effects, the objective beingto arrive at rules that facilitate economically ‘efficient’ mixedexpenditures. Such ‘efficient’ expenditures occur when the combinedpersonal and business benefits associated with the outlay exceed theactual costs incurred. Griffith argues that an ideal tax system shouldpromote efficient mixed expenditures and discourage inefficient ones. 193He suggests an ‘excess cost’ method which disallows the deduction ofany excess of the cost of any expenditure over its income-earning orbusiness value, effectively taxing the personal consumption elementimbedded in mixed expenditures. A similar effect could be achieved underan ‘allocation of cost’ method, which decomposes a mixed expenditure187188189190191192193Stanley S. Surrey (1973), Pathways to Tax Reform (Cambridge, Mass.:Harvard University Press), pp. 15 – 24; Joseph M. Dodge, (1993) TaxingHuman Capital Acquisition Costs – Or Why Costs of Higher EducationShould Not Be Deducted or Amortised, Ohio State Law Journal 54, pp. 927-984; Richard Goode, (1976) The Individual Income Tax (Washington: theBrooklings Institution, p. 14. See also Tim Edgar (1997) The Concept ofTaxable Consumption and the Deductibility of Expenses under an IdealPersonal Income Tax Base, op cit, pp. 305 – 306.Ibid, pp. 365 – 367.Tim Edgar (1997) The Concept of Taxable Consumption and theDeductibility of Expenses under an Ideal Personal Income Tax Base, op cit,pp. 311 – 315.William A. Klein, (1966) The Deductibility of Transportation Expenses of aCombination of Business and Pleasure Trip – A Conceptual Analysis,Stanford Law Review, 18: 1099 – 1118.Daniel I. Halperin, (1974) Business Deduction for Personal Living Expenses:A Uniform Approach to an Unsolved Problem, University of PennsylvaniaLaw Review 122: 859 – 933.Thomas G. Griffith, (1994) Efficient Taxation of Mixed Personal andBusiness Expenses 41 UCLA Law Review 1769 – 1789.Thomas G. Griffith, (1994) Efficient Taxation of Mixed Personal andBusiness Expenses, ibid, p. 1770.Bode OyetundePage 35 of 63PhD CandidateCentre for Commercial Law StudiesQueen Mary & Westfield College
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Reasonable Business Expense - The Chartered Institute of Taxation

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