Recouping Losses: The Case for Full Loss Offsets

Abstract

All too frequently today, American businesses lose money. Under the current tax laws, a loss, by itself, has little or no significance: Unless the loss can offset other income, it goes unnoticed by the Internal Revenue Code. Our thesis is that this state of affairs is highly inequitable and distorts investment decisions. We propose instead that business losses give rise to tax refunds, paid out to corporations in an exact reversal of the process by which profitable corporations now pay their taxes. of the process by which profitable corporations now pay their taxes. This proposal for recoupment of losses may at first glance appear quite novel, but it was suggested over thirty years ago by the United States Tax Court in Alprosa Watch, and proposals endorsing recoupment have persisted, despite vigorous criticism. We believe that upon closer examination, a compelling case can be made for preferring recoupment to the current loss deduction regime.