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The Popular Definition of Income and Its Implications for Tax Policy

1 min readBy: Arthur P. Hall, Ph.D.

Download Special Report No. 68

Special Report No. 68

Executive SummaryThe debate about overhauling the federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system is, at the most fundamental level, a debate about the proper tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. — in effect, the proper economic definition of income. The statutory history of the income tax has generally relied on a definition of income imputed to the “common man,” a definition which the Supreme Court effectively ratified in the 1921 Eisner v. Macomber case.

However, as the survey results reported in indicate, the popular definition of income —when compared with scientifically consistent definitions of income — is replete with internal inconsistencies. Indeed, for purposes of taxation, only one scientifically consistent definition of income exists — that definition which underpins current federal pension laws, also known as “yield income.”