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Haig-Simons

• Income = Consumption + Change in
Wealth
• Y = C + ΔW
• More important to focus on
– Consumption
– Wealth

. • Consumption provided by third party => increase in income – Employer provided car • Decrease in wealth – If used to buy consumption. – If used to pay for something other than consumption or investment. no effect on income. no effect on income. – If used to buy asset or investment.Haig-Simons and Theory of Income • Focus on wealth and consumption. • Increase in wealth => increase in income. then decrease in income.

000 investment – No change in wealth – Only change in form • Pay rent on office building – Wealth goes down – Deduction .Examples • Paycheck = increase in wealth / income • Employer provided vacation = increase in consumption / income • Buy your own vacation – Wealth decreases but – Consumption increases • Buy $10.

What Escapes H-S Income • Unrealized capital gains. . • Imputed income.

000 of income • Average rate – 8.000 is tax free – Remaining income taxed @ 50% – Arturo has $120.33% of income paid in tax – Justice / distribution • Marginal rate – 50¢ of any extra $1 of income goes to government – Efficiency / incentives .Average versus Marginal Rates • Example: – First $100.

Taxable Units • Touched on this in gifts – Individuals – Married couples – Families • Progressivity – Arturo (prior slide) has child. – Betty has no income. Betty. – What effect if Arturo can assign $20.000 of his income to Betty. .

Noncompliance • Innocent mistake – Taxes and interest • Negligence – 20% penalty • Substantial underpayment – 20% penalty • Civil fraud / criminal .

– Private Letter Ruling – Opinion from Skadden .Tax Opinions • Yahoo! wants to distribute its large stake in Alibaba to Yahoo! shareholders.ms/1UFb531 • Question: does Yahoo! or its shareholders have income. – http://nyti.

Mechanics • Gross income – “Above the line deductions” • Adjusted gross income – Exemptions – Standard or itemized deductions • Taxable income • Credits .

• AGI used to determine eligibility for tax benefits.Why AGI Matters • Above the line deductions are “better” than itemized. – Student loan interest deduction . – Itemized can be phased out. – Itemized deductions do no good if you take standard deduction.

. • Arguments (more later in course) – Encourage capital formation / investment / mobility – Blatant giveaway to the rich.Capital Gains and Dividends • Roughly speaking. taxed at 1/2 of ordinary rate.

profits. – Cash method: when money hits your hand or leaves your profits.Accounting vs. – Generally. etc. • Accounting – We do we tax compensation. sale or exchange. Realization • Realization – When do we tax changes in property value. – Accrual method: more later .

TPs defer tax even if there is realization (nonrecognition) .Recognition versus Realization • Realization is an event – Sale – Exchange • Recognition is the tax consequences from event – Taxable Gain – Deduction Loss • Sometimes.

Deferral • Money today is better than money tomorrow. • Payments tomorrow are better than payments today. • Example – $100 today versus $100 in one year – 5% interest rate .

. but should have been): There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.Gains and Losses • IRC § 61(a)(3): gains from dealing in property includible • IRC § 165(a) (not assigned.

-6(b) (skim only). we might have different AB for gain than for loss.61-6(a). §§ 1. – (b) AR = value of what you received – (c) Generally recognize any realized gain or loss.Mechanics of Gain and Loss • I. § 1001(a)-(c) – (a):Computing Gain or Loss • Gain = AR – AB • Loss = AB – AR • With gifts. Reg. 1.R.C.1011-1 . • Treas.

1016 – Generally. • Conceptually important point – Adjusted basis is unrecovered cost. 1012(a).C. . – Adjustments. • Additional costs (like improvements). • Recovered costs (like depreciation). which we’ll cover later.R. §§ 1011(a). we start with cost.Adjusted Basis (AB) • I.

.000 • Subtract $200.5 million.000. • Start with $1 million • Add new costs of $100. – Tax deduction • 2016: Sell building for $1.5 million. – AR = $1.000 of value.AB Example • 2010: Buy building for $1 million. – New cost • 2010-2015: Depreciate $200. – AB is like a deduction against AR.000. Already deducted these amounts. • 2012: Add improvements of $100.