
Contents
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3.1 Introduction 3.1 Introduction
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3.2 Individual Taxable Income: An Introduction via a Tour of a Haig-Simons Tax Form 3.2 Individual Taxable Income: An Introduction via a Tour of a Haig-Simons Tax Form
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3.2.1 Haig-Simons Income 3.2.1 Haig-Simons Income
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3.2.2 Gross Income 3.2.2 Gross Income
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3.2.2.1 Returns to Owners of Human Capital 3.2.2.1 Returns to Owners of Human Capital
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a. Income from Employment a. Income from Employment
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b. Deferred Compensation (Pension Income) b. Deferred Compensation (Pension Income)
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c. Income from the Supply of Labour Services Unrelated to Employment c. Income from the Supply of Labour Services Unrelated to Employment
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3.2.2.2 Returns to Owners of Nonhuman Capital 3.2.2.2 Returns to Owners of Nonhuman Capital
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3.2.2.3 Benefits from Government Programmes 3.2.2.3 Benefits from Government Programmes
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3.2.2.4 Other Transfers 3.2.2.4 Other Transfers
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3.2.3 Exemptions from Gross Income 3.2.3 Exemptions from Gross Income
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3.2.4 Expenses of Earning Income 3.2.4 Expenses of Earning Income
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3.2.4.1 Expenses Directly Related to the Accrual of Market Income 3.2.4.1 Expenses Directly Related to the Accrual of Market Income
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3.2.4.2 Indirect and Overhead Expenses 3.2.4.2 Indirect and Overhead Expenses
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3.2.5 Taxable Income, Tax Accrued, Credits, and Net Tax Payable 3.2.5 Taxable Income, Tax Accrued, Credits, and Net Tax Payable
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3.3 A Collection-Based Income Tax that Can Be Administered 3.3 A Collection-Based Income Tax that Can Be Administered
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3.3.1 Foundational Issue: Who Is the Taxpayer? 3.3.1 Foundational Issue: Who Is the Taxpayer?
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3.3.1.1 Basic Definition 3.3.1.1 Basic Definition
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3.3.1.2 Discussion of Basic Definition 3.3.1.2 Discussion of Basic Definition
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a. Resident Taxpayers a. Resident Taxpayers
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b. Registered Taxpayers b. Registered Taxpayers
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3.3.1.3 Two Exceptions 3.3.1.3 Two Exceptions
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a. Treatment of Nongovernmental Organizations (NGOs) a. Treatment of Nongovernmental Organizations (NGOs)
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b. Government b. Government
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3.3.1.4 Individual or Related Parties 3.3.1.4 Individual or Related Parties
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3.3.1.5 Aggregation into One Unit 3.3.1.5 Aggregation into One Unit
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3.3.1.6 Foundational Issue: Jurisdictional Basis for Tax 3.3.1.6 Foundational Issue: Jurisdictional Basis for Tax
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3.3.2 Foundational Issue: What Is the Tax Base? 3.3.2 Foundational Issue: What Is the Tax Base?
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3.3.2.1 A Practical Comprehensive Tax Base 3.3.2.1 A Practical Comprehensive Tax Base
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a. Gross Income a. Gross Income
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b. Deferred Compensation and Performance Incentives b. Deferred Compensation and Performance Incentives
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c. Relationship between Advanced Tax and Social Taxes c. Relationship between Advanced Tax and Social Taxes
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3.3.2.2 Income from Nonhuman Capital 3.3.2.2 Income from Nonhuman Capital
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a. Assets for Which Capital Values Are Known (Time Deposits) a. Assets for Which Capital Values Are Known (Time Deposits)
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b. Assets for Which Market Values Are Not Known until Liquidation b. Assets for Which Market Values Are Not Known until Liquidation
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c. Treatment of Incentives c. Treatment of Incentives
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3.3.2.3 Expenses of Deriving Income 3.3.2.3 Expenses of Deriving Income
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a. Interest Expense a. Interest Expense
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b. Investments in Human Capital b. Investments in Human Capital
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c. Insurance c. Insurance
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d. Other Costs of Earning Market Income d. Other Costs of Earning Market Income
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3.3.3 Methods to Simplify the Deductions and Income Distributional Considerations 3.3.3 Methods to Simplify the Deductions and Income Distributional Considerations
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3.3.3.1 Allow or Require a Standard Deduction 3.3.3.1 Allow or Require a Standard Deduction
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3.3.3.2 Employ a Refundable Tax Credit for Personal Circumstances 3.3.3.2 Employ a Refundable Tax Credit for Personal Circumstances
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3.3.3.3 A Note about the Final Return at Death 3.3.3.3 A Note about the Final Return at Death
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3.3.4 Sequence of Income Tax Reforms 3.3.4 Sequence of Income Tax Reforms
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3.3.4.1 Basic Structure 3.3.4.1 Basic Structure
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3.3.4.2 Evolution 3.3.4.2 Evolution
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3.4 Other Administrative Issues 3.4 Other Administrative Issues
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3.4.1 Flow through for Advanced Taxes for APAs 3.4.1 Flow through for Advanced Taxes for APAs
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3.4.2 Advanced Payments for Employees 3.4.2 Advanced Payments for Employees
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3.4.3 Transfer Pricing 3.4.3 Transfer Pricing
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3.4.3.1 The Problem 3.4.3.1 The Problem
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3.4.3.2 Ways to Approach the Problem 3.4.3.2 Ways to Approach the Problem
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a. Use Asset-Stripping Rules a. Use Asset-Stripping Rules
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b. Set Arbitrary Maximums b. Set Arbitrary Maximums
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c. Set Output Prices as a Proportion of the Market Price of Final Output c. Set Output Prices as a Proportion of the Market Price of Final Output
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d. Impose Withholding Taxes on Related Party Charges d. Impose Withholding Taxes on Related Party Charges
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3.4.3.3 Definition of Related Party 3.4.3.3 Definition of Related Party
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3.4.3.4 Summary 3.4.3.4 Summary
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3.4.4 A Note about Permanent Establishments 3.4.4 A Note about Permanent Establishments
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3.4.5 Foreign Tax Credits 3.4.5 Foreign Tax Credits
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References References
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Cite
Abstract
Income taxation is the cornerstone of the authors’ approach to longer-term reform. Therefore, it is important to examine how income is derived both methodologically and practically. The specific practical structure proposed in this chapter is based on the use of Advance Payment Agents, described in Chapter 2, to collect tax on the components of income as they accrue. The extent to which taxable income is aggregated into an empirical measure of comprehensive income with the advanced payments used as a credit will depend on administrative capacity and public awareness. A practical standard for income taxation is described in this chapter. The standard is an empirical measure of income from market interactions based on one derivation of Haig-Simons Income. The standard is an objective to be achieved through time. Knowledge of the standard is necessary, however, in order to implement piecemeal policy consistent with the longer term goal. One strategy for emerging economies is described.
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