Question

haig-simmons provides a definition of income which provides the basic construct of the personal income tax . Please explain that definition , discussing how taxable income is determined . The tax is progressive , not only as a result of the rate structure , but also because of the addition of certain credits . Please provide an example

Answer 1

Haig simons defines income as a measure by the economists to analyze the well being of the economy which defines it as income= consumption + change in the net worth.

I= C + ∆NW

he referred to income tax as an individual's annual consumption plus current addition in the savings.

Taxable income is determined by the total consumption of the individual as sales tax or value added tax till it finally reaches the final consumer as it is followed by the US.

The tax is progressive as it increases with the income of the individual so as to ensure that the taxpayer's average tax rate is less than the person's marginal tax rate. Progressive means it increases with the income of the person.

For eg.- The income tax slabs in india are as follows:

Upto 2,50,000 = nill

2,50,001-5,00,000 = 5% of the income exceeding 2,50,000

5,00,001-10,00,000 = 12,500 + 20% exceeding 5,00,000

10,00,000 above = 1,12,500 + 30% of the income exceeding 10,00,000

This shows that income tax is progessive in nature as it continues to increase with the increase in income. Income increase= income tax rate increase.