Haig-Simons equation
Encyclopedia
Haig–Simons income or Schanz–Haig–Simons income is a measure of economic income as
where C = consumption
and ΔNW = change in net worth
.
Here, broadly speaking, consumption refers to the purchase or acquisition of goods and services of any kind. From a perfect theory view, consumption does not include capital expenditures and the full spending would be amortized.
. His concept was further developed by the American economist
s Robert M. Haig and Henry C. Simons in the 1920s and 1930s.
Haig defined personal income as "the money value of the net accretion to one's economic power between two points of time," a formulation that was intended to include the taxpayer's consumption.
That was thought by Simons to be interchangeable with his own formulation:
In this concept, all inflows and outflows of resources are considered taxable income in a broad sense, including donation
s and windfall gain
s.
By contrast, the base for a theoretically correct Schanz–Haig–Simons (SHS) income tax is each individual's annual consumption plus current additions to savings. Thus current receipts which are otherwise taxable remain in the tax base, even if they are saved, and withdrawals from earlier savings are not currently taxed since they were assessed in a prior year. Stated differently, the SHS tax base has two components—current consumption and current savings (including current appreciation accruing to earlier investments) -- whereas a cash-flow consumption tax has only a single component—current consumption.
In spite of their differences, however, both a cash-flow consumption tax and an SHS tax require that dollars paid out as business or investment expenses be eliminated from the base. This is necessary under a cash-flow consumption tax because business and investment expenses are not consumption and it is necessary under an SHS tax because these expenditures are neither consumption nor additions to savings. Since business and investment outlays have no place in the base of either tax, intuition suggests that business and investment interest expenses would be treated identically under a cash-flow consumption tax and an SHS tax. But they are not. The SHS tax and the cash-flow consumption tax take different structural approaches to the treatment of business and investment interest outlays although both systems share the general objective of removing current business and investment costs from the tax base.
and most states in the USA employ a tax on Haig–Simons income with a consumption tax
. In the European Union, a value added tax
applies to purchases of goods and services on each level of exchange until it reaches the ultimate consumer. In the US, most states tax purchases of goods with a sales tax
.
:
Others observe that it is "only a surrogate utility measure."
Some fault it for neutrality between savings and consumption.
Some scholars resist these criticisms, to the extent they conceive of Haig–Simons as dependent on utility; Simons rejected utility as the basis of the ability-to-pay standard. Indeed, Simons rejected both the notion that humans are "equally efficient pleasure machines," and the idea that taxation can take account of interpersonal utilities. Simons sought a measurable definition for income but his solution is open to criticism for reifying troubling dichotomies; for example, the Haig–Simons definition depends on the distinction between market and non-market values.
- I =C + ΔNW
where C = consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
and ΔNW = change in net worth
Net worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
.
Here, broadly speaking, consumption refers to the purchase or acquisition of goods and services of any kind. From a perfect theory view, consumption does not include capital expenditures and the full spending would be amortized.
History
The measure of the income tax base equal to the sum of consumption and savings was first advocated by German legal scholar Georg von SchanzGeorg von Schanz
Georg von Schanz was a German legal scholar. He originally developed a definition of income, now known as Haig-Simons income.-References:...
. His concept was further developed by the American economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
s Robert M. Haig and Henry C. Simons in the 1920s and 1930s.
Haig defined personal income as "the money value of the net accretion to one's economic power between two points of time," a formulation that was intended to include the taxpayer's consumption.
That was thought by Simons to be interchangeable with his own formulation:
- "Personal income may be defined as "the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question."
In this concept, all inflows and outflows of resources are considered taxable income in a broad sense, including donation
Donation
A donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause. A donation may take various forms, including cash, services, new or used goods including clothing, toys, food, and vehicles...
s and windfall gain
Windfall gain
-Types of Windfall Gains:The list of windfall gains includes, but is not limited to:*Lottery winnings*Unexpected inheritance*Gains from demutualization-Uses of Windfall Gains:What people do with windfall gains is subject to much debate...
s.
SHS income tax vs. cash-flow consumption tax
A cash-flow consumption tax is intended to confine the cash-flow tax burden to an individual's annual consumption and to remove nonconsumption expenses and current savings from the tax base. The base is calculated by combining the year's gross receipts and savings withdrawals, and then subtracting the year's business and investment expenses and the year's additions to savings. Progressive rates are applied to the resulting sum.By contrast, the base for a theoretically correct Schanz–Haig–Simons (SHS) income tax is each individual's annual consumption plus current additions to savings. Thus current receipts which are otherwise taxable remain in the tax base, even if they are saved, and withdrawals from earlier savings are not currently taxed since they were assessed in a prior year. Stated differently, the SHS tax base has two components—current consumption and current savings (including current appreciation accruing to earlier investments) -- whereas a cash-flow consumption tax has only a single component—current consumption.
In spite of their differences, however, both a cash-flow consumption tax and an SHS tax require that dollars paid out as business or investment expenses be eliminated from the base. This is necessary under a cash-flow consumption tax because business and investment expenses are not consumption and it is necessary under an SHS tax because these expenditures are neither consumption nor additions to savings. Since business and investment outlays have no place in the base of either tax, intuition suggests that business and investment interest expenses would be treated identically under a cash-flow consumption tax and an SHS tax. But they are not. The SHS tax and the cash-flow consumption tax take different structural approaches to the treatment of business and investment interest outlays although both systems share the general objective of removing current business and investment costs from the tax base.
Tax on change in wealth
The Haig–Simons equation is different from the USA's individual income tax base calculations. For example, any employer contributions to employee health insurance are not included in taxable employee income. Under the Haig–Simons definition of income, such contributions would be included in income. Such contributions might not be included in a Haig–Simons income tax base, however, if their exclusion reflected "an appropriate adjustment in measuring ability to pay."Tax on consumption
The European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
and most states in the USA employ a tax on Haig–Simons income with a consumption tax
Consumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...
. In the European Union, a value added tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
applies to purchases of goods and services on each level of exchange until it reaches the ultimate consumer. In the US, most states tax purchases of goods with a sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
.
Criticisms of the definition
Some argue that the definition is tautologicalTautology (logic)
In logic, a tautology is a formula which is true in every possible interpretation. Philosopher Ludwig Wittgenstein first applied the term to redundancies of propositional logic in 1921; it had been used earlier to refer to rhetorical tautologies, and continues to be used in that alternate sense...
:
- it is "little more than an accounting identity, a tautology: it tells us only that all income is either spent [consumption] or not [savings], which is obvious enough".
- "net receipts, receipts minus the cost of obtaining the receipts, tautologically consists of consumption plus savings. All money the taxpayer controls or 'voluntarily' disposes of must go to either consumption or savings".
Others observe that it is "only a surrogate utility measure."
Some fault it for neutrality between savings and consumption.
Some scholars resist these criticisms, to the extent they conceive of Haig–Simons as dependent on utility; Simons rejected utility as the basis of the ability-to-pay standard. Indeed, Simons rejected both the notion that humans are "equally efficient pleasure machines," and the idea that taxation can take account of interpersonal utilities. Simons sought a measurable definition for income but his solution is open to criticism for reifying troubling dichotomies; for example, the Haig–Simons definition depends on the distinction between market and non-market values.
See also
- Flat tax on consumption