> The fundamental dynamic is that the government wants there to be a forcing function on having to actually realize profits, so that taxes have to be paid in a timely fashion. They don't
want people to be able to reinvest all of the effective profit and keep kicking the can into the future indefinitely.
I would have to question whether that is actually a good policy.
To begin with, it doesn't work unless you do it consistently, which they don't. Then businesses defer the taxes anyway, and you get huge market distortions because it majorly affects where investments go, e.g. we're then lacking for sufficient housing construction because it's heavily disfavored by the tax code over alternatives. But doing it consistently also doesn't work because many of the industries that have exemptions have them because they would implode without them. In particular, anything that experiences significant foreign competition would be screwed as soon as the other country does it the other way. It would also create bad incentives -- you'd have to get rid of the retirement deferral, damage everyone's retirement savings and create perverse incentives for immediate spending over saving/investing.
Moreover, the main reason we use an income tax instead of a consumption tax is in order to have a progressive rate structure. If you want to put a different effective rate on someone who spends $1M/year than someone to spends $10k/year, a merchant collecting the tax at the point of sale wouldn't know what rate to charge. (There are also other ways to achieve this, like combining a flat consumption tax with a UBI to achieve the desired effective rate curve, but that's a more systemic change.)
But if you allow business expenses to be deducted immediately, that's another path to having a consumption tax with a progressive effective rate curve. The rate can be higher for the people who spend more but you still have to pay the tax when you want to buy a yacht or a personal mansion. It also gives you a way out of the "they borrow money to avoid realizing capital gains" thing: Make the loan taxable income in the year it's taken out and a deduction in the year it's paid back, but if it's a business loan then you get a canceling deduction when you take it out and invest it (and the same for e.g. student loans), which makes it so you can't spend the money on personal consumption without paying the tax.
Meanwhile if you always reinvest 100% of profits then you don't pay tax until you stop, but that's what we want them to do. Build housing, hire people, invent things, donate to charity. These things are tax deductions on purpose.