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![handle is hein.taxfoundation/srgixz0001 and id is 1 raw text is: TAX
FOUNDATION
March 1997,
No. 68
The Popular Def'mition of Income and Its
Implications for Tax Policy
The debate about overhauling the federal
tax system is, at the most fundamental level, a
debate about the proper tax base - in effect,
the proper economic definition of income.
The statutory history of the income tax has
generally relied on a definition of income im-
puted 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 Figure 1 indi-
cate, the popular definition of income -
when compared with scientifically consistent
definitions of income - is replete with inter-
nal inconsistencies. Indeed, for purposes of
taxation, only one scientifically consistent defi-
nition of income exists - that definition
which underpins current federal pension laws,
also known as yield income.
Survey Design and Results
The Tax Foundation collected 104 com-
pleted copies of the survey shown as Figure 1.
Most of the survey questions were taken from
a similar survey published in a 1942 book by
Irving and Herbert W. Fisher, titled Construc-
tive Income Taxation: A Proposal for Reform.
The survey was replicated, in part, to assess
the continuity of the common man's defini-
tion of income over time. The results of the
two surveys were virtually identical.
The aggregate results of the Tax Founda-
tion survey (as a percent of the answers re-
ceived) were placed next to each available re-
sponse of Figure 1. The sample of resultswas
also truncated to include only the responses of
those people likely to be more familiar with
the details of tax law: accountants, financiers,
and lawyers. In this truncated sample, the
most popular responses remained the same,
but the shares of such responses increased.
Putting the Survey Responses in Context
Only two definitions of income have logi-
cal consistency - accretion income and
yield income. Yield income constitutes a
definitional subset of accretion income. With
the exception of questions 10 and 11, the sur-
vey was designed to limit answers to either the
yield or accretion definition of income, with
an undecided response allowed for each
question. Questions 10 and 11 allowed for a
response based upon the make-shift realization
criterion of income. [An extended discussion
about the intellectual lineage of accretion and
yield income may be found in the Tax Founda-
tion Background Paper No. 17 (March 1997),
titled The Concept of Income Revisited: An
Investigation into the Double Taxation of Sav-
ing.]
Accretion income also goes by the name
of Haig-Simons income, in tribute to the writ-
ings of economists Robert M. Haig and Henry
C. Simons. Over a designated accounting pe-
riod, accretion income equates to:
Money earned but not saved + Net capital
accumulation (whether through new sav-
ing or changes in the market value of ex-
isting savings).
The term accretion evolved out of Haig's
reference to the accretion of value in a
person's wealth (capital accumulation) over an
accounting period. The philosophical essence
of the Haig-Simons standard involves the acqui-
sition of economic power, the power to com-
mand goods and services produced in the
economy, regardless of whether or not such
power is actually exercised. In the tax laws to
date, because of its link to accounting prac-
tice, the concept of accretion income has pre-
By Arthur P. Hall, Ph.D.
Senior Economist
Tax Foundation](ViewImageLocal?handle=hein.taxfoundation/srgixz0001&div=1&collection=&method=preview&ext=.png&size=3)