Part 5 – The United States Revenue System
Chapter 17 – The Personal Income Tax
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 greater capital losses to be deductible
against other forms of income would move the tax system more in the direction of the
It is not clear how these benefits should be treated under the Haig-Simons definition of
income. If these benefits were pure work expenses, then they should not be counted as
income. If, on the other hand, they were a fringe benefit, then the cell-phone, wireless
card, and Internet expenses should be counted as income according to the Haig-Simons
definition, since they represent a net increase in the individual’s power to consume.
would be difficult to devise a consistent system for determining what percentage of the
use would be personal if the devices were provided so that the person could work from
Suppose Singh 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 or 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.
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 28 percent rate
applies to capital gains, the capital gains tax is 28 percent of $210 or $58.80.
is left with $1,210 - $58.80 or $1,151.20 after tax.
If Singh follows Option B, the value of the oil stock at the start of period 1 is $1,000, the
capital gain is $100, and the tax $28.
Thus Singh has $1072 left over to proceeds (V)
from selling the gold stock at the end of period 1.