Using Human-Capital Theory to Establish a Potential-Income Tax

Abstract

There are good arguments for an individual income tax on potential income, but a drawback to such a tax is the significant administrative concern regarding its implementation. This paper argues that human-capital theory provides a widely accepted and straightforward method to estimate potential income using observed characteristics of individuals, and operationalizes this approach using data for the U.S. The paper also suggests that a potential-income tax is very similar to a presumptive income tax. The paper concludes by reviewing some significant problems with the implementation of a potential or presumptive income tax.

Informal sector taxes and equity: Evidence from presumptive taxation in Zimbabwe

“…15 A presumptive tax is essentially a tax levied on potential income, and has even been referred to as "potential income tax" in the literature. To ensure equity across activities, the tax liability should be based on the income-generating potential of the businesses in that activity (Faulk et al, 2007). 16 According to ZIMRA's research department, in their study of the urban transport industry they randomly sampled informal transport operators throughout the country.…”

“… A presumptive tax is essentially a tax levied on potential income, and has even been referred to as “potential income tax” in the literature. To ensure equity across activities, the tax liability should be based on the income‐generating potential of the businesses in that activity (Faulk et al., ). …”

The Optimality of Tax Transfers: What does Life Satisfaction Data Tell Us?

“…In this exercise the authors acknowledge that if talent were truly used as a basis for taxation, then individuals might endeavour to have their talent mismeasured. Nevertheless, the basic insight that tax evasion brings distortions is a key reason for economists to argue for taxation on relatively inelastic goods, such as land and consumption (see, for example, Faulk et al 2007).…”