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More on Income

Here’s a letter to a long-time reader of Café Hayek, who is quick to tell me that he has “never bought the Haig-Simons definition.”

Mr. S__:

Thanks for your e-mail.

You’re correct that “public finance economics has the Haig-Simons definition of income that includes increases in asset values which are not necessarily realized.” And I perhaps ought to have mentioned that concept in my letter. But both Robert Haig and Henry Simons developed their concept of income after the 1913 ratification of the 16th amendment (although there was a late 19th century German work that hinted at the same idea).

More importantly, common usage is clear that “income” refers to realized monetary gains. No one would say that Smith, upon completing college and having thus increased her expected lifetime earnings by $1.2 million, had an income of $1.2 million (or whatever is its net present value) on graduation day or in the year in which she graduated. Also, I’ve never met anyone who, when describing in conversation his income, includes increases in the market value of his home or of the antique car carefully preserved in his garage.

As my friend Bill Heasley suggested to me, the dictionary definition is crucial. Here’s the American Heritage Dictionary of the English Language definition: “1. The amount of money or its equivalent received during a period of time in exchange for labor or services, from the sale of goods or property, or as profit from financial investments.” This dictionary then says this about the word’s origin: “Middle English, arrival, entrance, from incomen, to come in.”

The plain meaning of these words comes across to me, as I submit it does to everyone not grasping for excuses to expand the tax base through legerdemain, as referring to realized – “received” – economic gains.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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