Tax Bases
Anderson: Structure of Taxes
What is Taxed? Defining the Tax Base
• The tax base reflects what is taxed,
• and therefore what is not taxed as well.
Copyright © by Houghton Mifflin Company. All rights reserved.
2
Haig-Simons Definition of Taxable Income
• Income during a particular period of time includes consumption plus the
change in a person’s net worth
• Consumption or change in potential future consumption
• Net measure, it requires that the costs of earning income be subtracted
• Blind to the source of income. It doesn’t matter whether income is due to
capital or labor
• Should include imputed income
• All accretion to wealth should be included, whether it is regular or
fluctuating, expected or unexpected, realized or unrealized.
• No consideration should be given to how the income is used, i.e. whether it
is saved or consumed
Copyright © by Houghton Mifflin Company. All rights reserved.
3
Basic Personal Income Tax Calculations
Jack has gross
income of $60,000,
from which he
subtracts some
deductions to get
adjusted gross
income (AGI). From
AGI, he subtracts his
family exemptions
and either the
standard deduction
or itemized
deductions (Jack
chooses the former),
yielding taxable
income. A tax
schedule is applied
to determine taxes
owed, and tax credits
are then subtracted
to arrive at the final
tax payment.
Structure of the Individual Income Tax in the United States
Computing the Tax Base
gross income The total of an
individual’s various sources of income.
adjusted gross income (AGI) An
individual’s gross income minus certain
deductions
Examples of Deductions between
Gross Income and Adjusted Gross Income
These adjustments have varied over time, but as of 2009 they include:
 Contributions to retirement savings through IRAs or self-
employed pension plans.
 Alimony paid to a former spouse.
 Health insurance premiums paid by the self-employed.
 One-half the payroll taxes paid by the self-employed.
 Educator expenses.
 Contributions to Health Savings Accounts.
 Expenses for job-related moves.
 Interest paid on student loans.
Structure of the Individual Income Tax in the
United States
Computing the Tax Base
exemption A fixed amount a
taxpayer can subtract from AGI for
each dependent member of the
household, as well as for the
taxpayer and the taxpayer’s spouse.
Structure of the Individual Income Tax in the
United States
Computing the Tax Base
There are two forms of deductions from which to choose:
standard deduction Fixed amount
that a taxpayer can deduct from
taxable income.
itemized deductions Alternative to
the standard deduction, whereby a
taxpayer deducts the total amount
of money spent on various
expenses, such as gifts to charity
and interest on home mortgages.
Structure of the Individual Income Tax in the
United States
Computing the Tax Base
Under the itemized deductions route, the taxpayer deducts from his or her
income the sum of amounts from several categories:
 Medical and dental expenses exceeding 7.5% of AGI.
 Other taxes paid, such as state or local income tax (or sales tax if the
state has no income tax), real estate tax, and personal property tax.
 Interest the taxpayer pays on investments and home mortgages.
 Gifts to charity.
 Casualty and theft losses.
 Unreimbursed employee expenses, such as union dues or expenses
incurred on job travel.
taxable income The amount of income left after subtracting
exemptions and deductions from adjusted gross income.
Structure of the Individual Income Tax in the
United States
Tax Rates and Taxes Paid
tax credits Amounts by which taxpayers are
allowed to reduce the taxes they owe to the
government through spending, for example,
on child care.
withholding The subtraction of estimated
taxes owed directly from a worker’s earnings.
refund The difference between the amount
withheld from a worker’s earnings and the
taxes owed if the former is higher.
Basic Personal Income Tax Calculations
Jack has gross
income of $60,000,
from which he
subtracts some
deductions to get
adjusted gross
income (AGI). From
AGI, he subtracts his
family exemptions
and either the
standard deduction
or itemized
deductions (Jack
chooses the former),
yielding taxable
income. A tax
schedule is applied
to determine taxes
owed, and tax credits
are then subtracted
to arrive at the final
tax payment.