Haig-Simons income

Haig–Simons income or Schanz–Haig–Simons income is an income measure used by public finance economists to analyze economic well-being which defines income as consumption plus change in net worth. It is represented by the mathematical formula:

where C = consumption and ΔNW = change in net worth.

Consumption refers to the money spent on goods and services of any kind. From a perfect theory view, consumption does not include capital expenditures and the full spending would be amortized.

The measure of the income tax base equal to the sum of consumption and savings was first advocated by German legal scholar Georg von Schanz. His concept was further developed by the American economists 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 donations and windfall gains.

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 that 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.

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