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is necessary under an SHS tax because these expenditures are neither consumption nor additions to savings. Since business and investment outlays have no place in the base of either tax, intuition suggests that business and investment interest expenses would be treated identically under a cash-flow consumption tax and an SHS tax. But they are not. The SHS tax and the cash-flow consumption tax take different structural approaches to the treatment of business and investment interest outlays although both systems share the general objective of removing current business and investment costs from the tax base.
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complex cash-flow tax. See J. Clifton
Fleming, Jr., Scoping Out the Uncertain Simplification (Complication?) Effects of VATs, BATs and Consumed Income Taxes, 2 Fla. Tax Rev. 390, 419-21 (1995). Thus, a cash-flow consumption tax is often understood as implying progressive rates. See Michael J. Graetz, Implementing a Progressive Consumption Tax, 92 Harv. L. Rev. 1575, 1579 (1979). Nevertheless, the cash-flow consumption tax examples in this article will all assume a flat-rate tax in order to simplify the analysis.
473:
and the
Personal Consumption Tax, 35 Tax Law. 415, 416 (1982) at 416; Alvin C. Warren, Jr., Would a Consumption Tax Be Fairer Than an Income Tax?, 89 Yale L.J. 1081, 1084 (1980); U.S. Treas. Dep't, Blueprints for Basic Tax Reform 113-43 (1977), at 2, 113. "The income-versus-consumption tax debate is about the treatment of savings." Edward J. McCaffery, Tax Policy Under a Hybrid Income-Consumption Tax, 70 Tex. L. Rev. 1145, 1149-55 (1992) at 1155.
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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.
472:
Jerome Kurtz, The
Interest Deduction Under Our Hybrid Tax System: Muddling Toward Accommodation, 50 Tax L. Rev. 153, 158-61 (1995) at 161; 1 U.S. Treas. Dep't, Tax Reform for Fairness, Simplicity and Economic Growth 191-93 (1984) at 191; ABA Section of Taxation Committee on Simplification, Complexity
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Some scholars resist these criticisms, to the extent they conceive of Haig–Simons as dependent on utility; Simons rejected utility as the basis of the ability-to-pay standard. Indeed, Simons rejected both the notion that humans are "equally efficient pleasure machines," and the idea that taxation can
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In spite of their differences, however, both a cash-flow consumption tax and an SHS tax require that dollars paid out as business or investment expenses be eliminated from the base. This is necessary under a cash-flow consumption tax because business and investment expenses are not consumption and it
453:
A flat-rate could be employed instead of progressive rates under a cash-flow tax. See
Treasury I, supra note 1, at 191. But if a flat-rate consumption tax were desired, it would generally be much simpler to use a value added tax, which cannot practically employ progressive rates, instead of the more
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The Haig–Simons equation is different from the USA's individual income tax base calculations. For example, any employer contributions to employee health insurance are not included in taxable employee income. Under the Haig–Simons definition of income, such contributions would be included in income.
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See 1 U.S. Treas. Dep't, Tax Reform for
Fairness, Simplicity and Economic Growth 191-93 (1984); U.S. Treas. Dep't, Blueprints for Basic Tax Reform 113-43 (1977). The leading explanation and defense of a cash-flow consumption tax is still William D. Andrews, A Consumption-Type or Cash Flow Personal
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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
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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
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take account of interpersonal utilities. Simons sought a measurable definition for income, but his solution is open to criticism for reifying troubling dichotomies; for example, the Haig–Simons definition depends on the distinction between market and non-market values.
492:
Alvin C. Warren, Jr., Accelerated
Capital Recovery, Debt, and Tax Arbitrage, 38 Tax Law. 549, 557 (1985); Blueprints, supra note 1, at 3, 64, 133; Stanley S. Surrey, Pathways to Tax Reform 20-21, 259 (1973). See also Simons, supra note 5, at
116:"Personal income may be defined as "the algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question."
482:
See David F. Bradford, Untangling the Income Tax 94, 96 (1986); Blueprints, supra note 1, at 119-20; Andrews, supra note 1, at 1149, 1151. See also, Treasury I, supra note 1, at 191; ABA, Sec. of Tax'n, supra note 3, at
463:
See Joseph M. Dodge et al., Federal Income Tax: Doctrine, Structure and Policy 27, 33 (1995); William D. Andrews, A Consumption-Type or Cash Flow
Personal Income Tax, 87 Harv. L. Rev. 1113 (1974) at 1116.
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See ABA Section of
Taxation Committee on Simplification, Complexity and the Personal Consumption Tax, 35 Tax Law. 415, 416 (1982); U.S. Treas. Dep't, Blueprints for Basic Tax Reform 113-43 (1977) at 113,
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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.
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Such contributions might not be included in a Haig–Simons income tax base, however, if their exclusion reflected "an appropriate adjustment in measuring ability to pay."
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applies to purchases of goods and services on each level of exchange until it reaches the ultimate consumer. In the US, most states tax purchases of goods with a
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it is "little more than an accounting identity, a tautology: it tells us only that all income is either spent or not , which is obvious enough".
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The measure of the income tax base equal to the sum of consumption and change in net worth was first advocated by German legal scholar
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Consumption refers to the money spent on goods and services of any kind. From a perfect theory view, consumption does not include
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Overview of the
Definition of Income Used by the Staff of the Joint Committee on Taxation in Distributional Analyses
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Nancy Staudt, The
Political Economy of Taxation: A Critical Review of a Classic, 30 Law & SOC'Y REV. 651 (1996)
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In this concept, all inflows and outflows of resources are considered taxable income in a broad sense, including
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investment expenses and the year's additions to savings. Progressive rates are applied to the resulting sum.
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Henry C. Simons, Personal Income Taxation: The Definition Of Income As A Problem Of Fiscal Policy 50 (1938).
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Schanz, Georg von (1896). "Der Einkommensbegriff und die Einkommensteuergesetze".
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Personal Income Taxation: the Definition of Income as a Problem of Fiscal Policy
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See, e.g., Stephen Utz, Ability to Pay, 23 WHITTIER L. REV. 867, 915-17 (2002)
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E.g., Tresch at 269; see also NICHOLAS KALDOR, AN EXPENDITURE TAX 53 (1955).
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That was thought by Simons to be interchangeable with his own formulation:
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Andrews, William D. (1972). "Personal Deductions in an Ideal Income Tax".
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RICHARD TRESCH, PUBLIC FINANCE: A NORMATIVE THEORY 267 (1981).
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Schoen, Wolfgang (2005). "Capital Gains Taxation in Germany".
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Some fault it for neutrality between savings and consumption.
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362:"A 'Comprehensive Tax Base' as a Goal of Income Tax Reform"
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Schanz–Haig–Simons income tax vs. cash-flow consumption tax
322:"The Concept of Income—Economic and Legal Aspects"
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to analyze economic well-being which defines income as
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SIMONS, PERSONAL INCOME TAXATION, supra note 1, at 11,
328:. New York: Columbia University Press. pp. 1–28.
95:. His concept was further developed by the American
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49:. It is represented by the mathematical formula:
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242:Joint Committee on Taxation (February 8, 2012).
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