Question

Think about what the definition of Haig-Simmons looks to achieve – that is, what is a fair way to define income for purposes of taxation. What represents your net income (your ability to spend)? Does the current Internal Revenue Code, as reflected by the form, accurately represent an individuals “net” income? Please write a detailed analysis for your explanation.

Answer 1

Haig Simons denition includes as components of income are:

• Wages, salary, commissions, profits of privately owned businesses, dividends, interest income from securities and bank accounts, tips, rental income.
• Transfer payments ( such as employment insurance benefits )
• Gifts or inheritances received
• Income in kind : the value of free ( or subsidized ) parking provided by an employer, the value of driving a company car for personal use, frequent yer miles earned from taking business trips, the value of accommodation in owner occupied housing
• The net increase in the real value of a person's assets

The basic Haig Simons denition of income is: A person's annual income is the value of what He/she could consume in that year, while keeping her wealth constant.

Notice that it's not what a person does consume in a year which is the basis for Haig Simons income ; it's what she could consume if she chose to keep the value of her wealth constant. So it is based on potential consumption, not actual consumption. The idea is that how well a person is should be measured by how much she could afford to consume each year. Haig and Simons felt that the measure of your income should be not what you actually did with it ( spend it or save it ), but what you could do with it.

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Yes, the Internal Revenue Code accurately represents an individual's net income becasuse the tax is a compulsary payment and it has to be deducted from the gross income of a individual. After deduction, particular individual has its net income, which he/she can be capable to spend according to his/her need and demands.

To calculate taxable income, which is the figure used by the Internal Revenue Service to determine income tax, taxpayers subtract deductions from gross income. The difference between taxable income and income tax is an individual's NI (NET INCOME).

For example, an individual has $60,000 in gross income and qualifies for $10,000 in deductions. That individual's taxable income is $50,000 with an effective tax rate of 13.88% giving an income tax payment $6,939.50 and NI of $43,060.50.

NI on Tax Returns

In the United States, individual taxpayers submit a version of Form 1040 to the IRS to report annual earnings. This form does not have a line for net income. Instead, it has lines to record gross income, adjusted gross income (AGI), and taxable income.

After noting their gross income, taxpayers subtract certain income sources such as Social Security benefits and qualifying deductions such as student loan interest. The difference is their AGI. Although the terms are sometimes used interchangeably, net income and AGI are two different things.Taxpayers then subtract standard or itemized deductions from their AGI to determine their taxable income. As stated above, the difference between taxable income and income tax is the individual's NI, but this number is not noted on individual tax forms.

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