Imputed income

Imputed income is the accession to wealth that can be attributed, or imputed, to a person when they avoid paying for services by providing the services to themselves, or when the person avoids paying rent for durable goods by owning the durable goods, as in the case of imputed rent.

Many countries, such as the United States, tax imputed income only in certain limited situations. Imputed income is sometimes difficult to measure, and tax policies regarding imputed income can have political consequences. For taxpayers, not taxing imputed income creates a tax incentive in favor of owning over renting, and in favor of self-service over hiring. For the economy, not taxing imputed income directs economic activity away from activities associated with extreme and severe division of labor.

Home ownership is an example of an instance involving imputed income from durable property. If someone lives in his own property, he forgoes the rental income on this property in exchange for not owing an equivalent amount of rent to someone else. He also avoids paying income taxes on that rental income. (In the specific example of home ownership in the United States, this effect is emphasized by allowing home owners to deduct interest on home mortgage debts when computing taxable income for U.S. federal income tax purposes.)

An example of imputed income in connection with personal services is the situation where a stay at home mother or father is not taxed on wages that the family implicitly "pays" her or him for their services. If she or he were working for compensation, the wages she or he might pay a hired employee would be taxed. This is a systemic unneutrality that is inevitable in any income tax; the tax favors "leisure" (including self-rendered benefits such as shaving and mowing one's own lawn) over "work" (services sold on the market for remuneration). The concept of imputing income is logically extensible to any service people perform for themselves, such as cooking their own meals, washing their own laundry, or even bathing themselves.

In dicta in 1934, the Supreme Court touched on the issue of the constitutionality of taxing imputed income:

If the statute lays taxes on the part of the building occupied by the owner or upon the rental value of that space, it cannot be sustained, for that would be to lay a direct tax requiring apportionment. The rental value of the building used by the owner does not constitute income within the meaning of the Sixteenth Amendment.

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