Deconstructing the Haig-Simons Income Tax and Reconstructing It as Objective Ability-to-Pay 'Cash Income' Tax

Abstract

This article argues that the classic Haig-Simons formulation of personal income, namely, an individual’s consumption plus net increases in wealth for the taxable year, was not actually embraced by Simons himself, is contrary to fundamental political values, and (unnecessarily) raises intractable problems. Contrary to what adherents to the Haig-Simons concept assume, consumption is not an independent category of income, but only a deduction-disallowance principle of limited use. Likewise, the “accretion” notion of “changes in wealth” – referring to changes in asset values – cannot be maintained in the face of the realization principle – embraced by Simons – which (on the income side) is widely understood to refer to the receipt of cash or its deemed equivalent. On the deduction side, the notion of realization has erred by following accrual principles. Accordingly, not only should accrual taxation be abandoned, but the tax treatment of borrowing should be completely revamped, and depreciation would be eliminated.

The problems attending the Haig-Simons income concept, as well as Simons’ goal of designing a tax compatible with a redistributive government, are resolved under an objective ability-to-pay personal income concept. Such a tax embraces the realization concept as a matter of principle. “Income” would refer to the flow of cash through an individual. Cash would be deemed to “flow out” not when it is spent on the purchase of an asset but rather when any asset purchased with cash is finally disposed of. Accordingly, the tax (called a “cash income tax”) would be a true income tax, as opposed to being a cash-flow consumption tax.

The larger claim is that tax fairness should take a place at the tax policy table along with economic efficiency and welfarism. The contrary claims that tax fairness is a vague, subjective, and/or indeterminate notion are rejected. The notion of objective ability to pay is an internal-to-tax tax fairness norm that is constructed from the ground up by considering the role of taxation (in a liberal society) to raise cash revenue in an annual budget cycle. It is also shown that the concept dictates the content of a fair income tax with remarkable specificity, and in a way that is comprehensible and user-friendly. Numerous issues frequently disputed (or taken for granted) by tax commentators are covered, including those of income tax vs. consumption tax, imputed income, in-kind income, basis indexing, the personal deductions, the taxable unit, entity taxation, and even international taxation.