Chapter 15 – The Personal Income Tax
Chapter 15 – The Personal Income Tax
1.
The Haig-Simons definition of income is the net change in the individual’s power to
consume during a given period.
This criterion suggests the inclusion of all sources of
potential increases in consumption and also implies that any decreases in an individual’s
power to consume should be subtracted in determining income.
Overall, it reflects the
broadest possible base of income.
Allowing capital losses of $5,000 to be deductible
against other forms of income, rather than the current $3,000, would move the tax system
more in the direction of the Haig-Simons criterion.
2.
From a Haig-Simons point of view, the McCain proposal makes sense.
According to
Haig-Simons, all income should be taxed at the same rate, regardless of the use to which
it is to be put.
Under the status quo, income (in the form of capital gains) is taxed at a
lower rate if it is donated to charity.
Note that wage income that is to be donated to
charity does
not
enjoy the same benefit.
Under the status quo, the tax price of a gift of appreciated property is 1 - t - tk*g, where t
is the marginal tax rate on ordinary income, tk is the tax rate on capital gains, and g is the
proportion of the gift that is appreciated property.
With the McCain proposal, the tax
price would be 1 - t.
Thus, the tax price goes up.
We expect charitable contributions to
go down by an amount that depends on the elasticity of charitable contributions with
respect to their tax price.
3.
Suppose Jones buys the oil stock for $1,000 at the start of period 0.
At the start of
period 1, he has two options.
a.
Hold the oil stock one more period, then sell.
b.
Sell the oil stock, buy the gold stock and hold it for one period.
In both cases, it is assumed that all assets are sold, and any taxes paid at the end of
period 2.
What are the returns to option a)?
At a 10 percent rate of appreciation,
the oil stock is worth $1,210 after period 2, the capital gain is $210 and assuming
a 29 percent rate applies to capital gains, the capital gains tax is 28 percent of
$210 or $58.80.
Thus, Jones is left with $1,210 - $58.80 or $1,151.20 after tax.