What Is Taxable?
| Author | Vern Krishna |
| Pages | 40-58 |
CHAPTER
3
WHAT
IS
TAXABLE?
A.
INTRODUCTION
Having determined
who is
taxable,
the
next question
a tax
system must
answer
is,
"What
is
taxable?"
In
this
chapter
we
look
at the
concept
of
"income"and
its
interpretation
in
income
tax
law.
In
chapters
4 to 10, we
shall explore
in
greater detail
the
various types
and
sources
of
income
and the
rules applicable
to
each
in the
computation
of the
taxable base.
B.
CONCEPT
OF
INCOME
ITA,
ss. 2 & 3
IT-334R2
21
February 1992 Miscellaneous Receipts
The
income
tax is a tax on
income. Thus, income
is to be
distinguished
from
other taxable bases such
as
capital, wealth,
and
consumption.
"Income"
has
different
shades
of
meaning depending
on the
context
in
which
it is
used. Hence,
its
usage
and
meaning
in
disciplines such
as
eco-
nomics
and
accounting
do not
always coincide with
its
usage
in tax
law.
The
term "income" means literally "incoming"
or
"what comes
in"
to
a
person. This literal meaning
is not
very
helpful,
though
it is
useful
to
understand
the
generic concept
of the
term
before
we
look
at the
dif-
ferent
types
of
income
for tax
purposes.
Webster's
Dictionary
defines
"income"
as "A
gain which proceeds
from
labour, business, property,
or
40
What
Is
Taxable?
41
capital
of any
kind,
as the
produce
of a
farm,
rent
of
houses, proceeds
of
professional
business,
the
profits
of
commerce,
or of
occupation,
or the
interest
of
money
or
stock
in
funds."
This dictionary meaning
is a
useful
starting point,
but is not
definitive
for tax
purposes.
"Income"
is
sometimes used
in
economics
to
mean
net
accretion
of
wealth.
Two
famous
economists, Haig
and
Simons,
for
example, defined
income
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."1
This
definition
is
conceptually sound,
but
unworkable
for tax
purposes.
It
calls
for an
accurate calculation
of the
value
of
goods
and
services con-
sumed over
a
time period,
and
also requires adjustments
for any
increase
or
decrease
in the
value
of
assets
on
hand
at the
beginning
and
end of the
time period. Such
a
process would require
frequent
valuation
of
assets
and
liabilities
by
every taxpayer obliged
to
calculate income
and
would
be
unworkable
for the
purposes
of
daily commerce. Never-
theless,
the
theory underlying
the
concept
is
valuable
in
understanding
what constitutes income.
Another
practical limitation
on the use of the
Haig-Simons
formu-
lation
of
income
is
that
it
takes into account
the
value
of
goods
and
ser-
vices consumed
by the
taxpayer over
a
period
of
time.
If
income
is
used
as a
measure
of a
taxpayer's ability
to pay
taxes, then
the
value
of
goods
and
services that
a
taxpayer consumes
is
relevant
to the
measurement.
There
are two
dimensions
to
consumption.
One can
consume goods
and
services that
are
purchased
or
exchanged
in the
marketplace
and to
which
the
market attaches
a
commercial value.
But a
person
can
also
consume
her own
goods
or
services without going into
the
marketplace.
Personal consumption
of
goods
and
services outside
of the
marketplace
enhances one's economic power
and
reflects
on
one's ability
to
pay.
Hence,
in
theory
at
least,
the
benefits
of
consumption should
be
imputed
to the
consumer
as
income.
For
example,
assume
that Harry,
a
lawyer,
earns
$80,000
a
year
from
his law
practice. Joseph,
a
farmer,
earns $70,000
from
his
farming
operations
and
consumes $10,000
of
meat
and
produce that
he
farms.
It
is
clear that both individuals have
the
same ability
to pay
taxes,
because each
has
earned
the
same amount
of
income, albeit
in
different
forms.
Harry earns
all his
income
in the
marketplace
and
must
buy his
meat
and
produce
in the
market. Joseph earns less cash income,
but
1
H.C. Simons,
Personal
Income
Taxation:
The
Definition
of
Income
as a
Problem
of
Fiscal
Policy
(Chicago: University
of
Chicago
Press,
1938)
at 50.
To continue reading
Request your trial