Question

What is comprehensive income according to the Haig-Simons criterion? Why don’t we tax people based on this definition of income?

Answer 1

According to the mentioned criteria, comprehensive income refers to the sum of consumption on goods and services done by the person on an yearly basis and net change in wealth or net worth of the person in that year. It can be illustrated as follows.

Comprehensive income (i) = Consumption (C) + change in wealth (NW)

On the basis of this criteria, the tax base includes current savings. The current savings are already considered in the tax base to collect the tax, used by the government. So, the comprehensive income, identified by Haig-Simons criterion, should not be taxed again.

Further, if taxed, then it will be double taxation and it will directly hit the consumption and decrease spending in the economy. So, there will be decrease in the overall tax revenue collection. Further, people will spend money to get their livelihood and any tax on this income, will again be compensated by the transfer payments or any other benefits by the government.