Abstract: Cash flow taxation, including some current proposals for U.S. tax reform, would exempt some capital income in the sense that there would be no difference between the pretax and after-tax rates of return on that capital. Although there is wide agreement on this proposition among tax policy analysts, the precise difference between income and cash flow taxation of capital income has been described in quite different ways. Like an income tax, a cash flow tax would include receipts from a variety of sources, including receipts from capital investment. The key distinction between the two taxes is that capital costs are currently deducted (or “expensed”) under the cash flow tax, whereas they are capitalized and later deducted (as depreciation or basis) under the income tax. This Article accordingly examines the effects of expensing in order to evaluate four different responses to the question of how much capital income taxed under an income tax is exempt under a cash flow tax: (1) all, (2) only the normal rate of return, (3) only the riskless rate of return, and (4) none. The goal of the analysis is to elucidate the assumptions underlying the different responses and the relationships among them. The analysis of each response includes a verbal explanation, a numerical example, and a simple algebraic model. In order to facilitate comparison of the two tax bases, the discussion assumes flat rate taxes, full loss offsets, and no inflation. Important transitional issues, such as the treatment of existing capital on substitution of a cash flow tax for an income tax are not considered. “Capital” is used here in the traditional sense of financial or physical capital, and therefore does not include human capital, which presents special problems for income taxation.5 The analysis begins with the simple case of a single rate of return on all capital, and then introduces multiple rates and risk taking.