Haig-Simons Definitions 1. Haig-Simons Definitions If the tax base were broadened to a Haig-Simons definition: Medical expenses should be taxed because although they are an unexpected cost, they are still consumption of a service. Housing mortgage interest should be taxed because housing generates an imputed income to the person that lives in the house. If the imputed income were declared on the tax return, then the taxpayer should be able to deduct the interest because by Haig-Simons we include net rather than gross income. The net income is the imputed value minus the interest expense. Since we don’t declare imputed income on the tax return, we shouldn’t be able to deduct the expense.

Haig-Simons Definitions (continued) 1. Haig-Simons Definitions (continued) If the tax base were broadened to a Haig-Simons definition: State and local income taxes should be taxed because government services are consumed by citizens. For example, we consume the benefits of roads, parks, policy services, and defense. If the imputed income were declared on the tax return, then the taxpayer should be able to deduct state and local income taxes because by Haig-Simons we include net rather than gross income. The net income is the imputed value of the government services minus the taxes. Since we don’t declare the value of government services on the tax return, we shouldn’t be able to deduct the expense. Charitable contributions should be taxed because people can consume some form of utility for giving. Unreimbursed employee business expenses should not be taxed because they are a cost of earning one’s income.

Haig-Simons Definitions (continued) 1. Haig-Simons Definitions (continued) If the tax base were broadened to a Haig-Simons definition: Unreimbursed employee business expenses should not be taxed because they are a cost of earning one’s income. We declare net income on the tax return. The net income is the amount the employer pays the employee minus the expenses that the employee incurs to earn that income.

Haig-Simons Definitions 2. Haig-Simons Definitions Should each be included in a Haig-Simons definition of income? Value of health insurance provided by an employer should be taxed because it health insurance is current consumption. Value of parking benefits provided by an employer should be included because a person consumes the parking as a benefit of employment. We can consider this in the same way as if the employer provided free lunch for employees everyday. Cash value of life-insurance policies should be taxed because the employee consumes the benefit of the life-insurance just as if they had purchased the insurance policy with their own assets.

Haig-Simons Definitions (continued) 2. Haig-Simons Definitions (continued) Should each be included in a Haig-Simons definition of income? Implicit rental value of automobiles owned should be taxed because they consume the services provided by the automobile. They should also be allowed to deduct the expenses of operating the vehicle as they consume the transportation services. State lottery winnings should be taxed because Haig-Simons is blind to the source of income. It increases one’s net and his or her ability to consume.

3. Calculate the following: Adjusted gross income (AGI) - Adjustments $5,000 AGI $70,000 b. Taxable income AGI $70,000 - Exemptions $3,800 - Itemized deductions $20,000 Taxable Income $46,200