Imputed Income Research Articles

The Apportionment of Direct Taxes Under the Constitution

Under the U.S. Constitution as amended by the Sixteenth Amendment, any federal that is a direct tax (which is not an must be apportioned among the states in accordance with the respective populations of the various states. The purpose of this Article to solve the riddle of what is a direct tax that is subject to the apportionment requirement. Since the apportionment requirement can only apply inequitably across the nation, the correct labeling of any federal (other than an income tax) as a direct tax amounts to the proverbial kiss of death, as no such will be enacted. Recent commentary has staked out positions on this issue that I consider to be incorrect. Bruce Ackerman argues that that the Thirteenth Amendment (abolishing slavery) effectively repealed the apportionment-of-direct-tax clauses. Calvin Johnson argues that direct tax means only a capable (without effort) of being fairly apportioned among the states in accordance with population, namely, a capitation or a on the states (a requisition). At the other end of the spectrum, Erik Jensen argues that direct tax means any personal other than an income I argue, on the basis of constitutional text, the formation of the constitution, post-ratification history, function, historical evolution, and judicial doctrine that direct tax encompasses only (1) capitation (head) taxes, (2) requisitions, and (3) taxes on real estate. The apportionment requirement made political sense in the Framing period by linking the representation of states with the taxation of states, and also appeared to serve some narrow instrumental concerns. However, the theory is skewed, mainly because states are not really taxed as states, and states (as states) are only tenuously represented in Congress. Also, although apportionment dealt with some instrumental concerns, it aggravated others. I conclude that (apart from requisitions and head taxes), apportionment makes sense only with respect to real estate taxes, which is the nearest to a state I also conclude that a real estate cannot be bootstrapped into validity as an tax. Nevertheless, federal taxes on personal property and imputed income from real estate are constitutional, if endowment taxes are not.

Rates of return on U.S. farm investments, 1940‐2003: a comparison of imputed returns versus residual income approaches

The rate of return on farm assets is a key indicator of the profitability of farm sector investments. The residual income approach is most commonly used to estimate the returns to farm assets, farmland, and labor and management. However this approach may be sensitive to the underlying assumptions. This study examines the implications of the residual return assumption by using alternative formulations for computing the rate of return to farm assets. Specifically, we develop the rate of return on agricultural assets using an alternative imputation method. We demonstrate that the presence of multiple quasi‐fixed factors implies the rate of return to farm assets may be understated by the residual income approach.

POVERTY AND INCOME DISTRIBUTION IN CHILE 1987-1998.: NEW EVIDENCE

This paper presents an update o­n the poverty and income distribution situation in Chile during the 90s. The analysis shows unambiguously that there was less poverty between 1994 and 1998 than in all earlier years, whether poverty is measured by the headcount, the poverty deficit or by any of the most sensitive poverty indices. The evidence also confirms that income inequality in Chile remains high by international standards. Nevertheless, notwithstanding the earlier observation, the overall picture o­n inequality is o­ne of a fairly stable distribution for the period as a whole, with changes in income shares being relatively small in proportion to the size of the shares themselves. In addition, this study develops and applies a methodology for the estimation of the imputed income transfers from government subsidies in health, education, and housing, for the years 1990, 1994, 1996 and 1998. The analysis has confirmed that adjustments for in-kind income transfers substantially reduce the Gini coefficient o­n income inequality. For 1998, this coefficient falls from 0.56 (unadjusted) to 0.50 (adjusted) and the ratio of the highest (richest) to the lowest (poorest) quintile falls from 20 to 11. These results suggest that social policies in Chile have had a significant impact in reducing income inequality, in spite of the fact that such policies are oriented towards poverty reduction rather than reduction in inequality per se.

Household Debt and the Tax Reform Act of 1986

Prior to the Tax Reform Act of 1986 (TRA 86), interest paid on all types of household debt was deductible from income before the payment of taxes. In 1986, Congress changed the law to phase out the deductibility of interest over a five-year period.' Congress believed deductibility of interest an incentive to invest in durables rather than assets which produce taxable income and, therefore, an incentive to consume rather than save.... By phasing out the present deductibility of personal Congress intended to eliminate from the prior tax law a significant disincentive to (Joint Committee on Taxation [JCT], 1987 p. 263). The other goal of the provision was to raise $9.6 billion per year in tax revenue by 1991. Because Congress determined that encouraging home ownership is an important policy goal, achieved in part by providing a deduction for residential mortgage interest, it chose to retain the residential mortgage interest deduction (JCT, 1987 pp. 263-64). Thus, mortgage interest was fully deductible for interest paid on debt secured by a taxpayer's first or second residence up to his basis in the residence. The Omnibus Budget Reconciliation Act of 1987 (OBRA 87) changed the law so that interest paid was fully deductible on up to $1 million in acquisition debt and $100,000 in home equity debt.2 Debt is categorized as acquisition debt if it is used for the purchase or improvement of a home; home equity debt includes all other debt secured by a home. By keeping the mortgage interest deduction, Congress may have provided a loophole that some taxpayers could exploit. There was no restriction on the use of home equity debt, and taxpayers who owned homes could borrow against their home equity to pay for the same purchases they had previously funded with loans. Homeowners were given an incentive to shuffle their portfolios away from debt into mortgage debt. The widespread introduction of home equity lines of credit in the mid-1980's, which may have been spurred in part by the change in tax law, provided an inexpensive and flexible method for households to make this shift.3 Measuring the extent of portfolio shuffling is important for understanding whether households view mortgage and debt as close substitutes. Clearly the substitution of mortgage debt for debt undermines the goals of Congress to boost saving and increase revenue. Moreover, homeowners already have substantial tax preferences through the lack of taxes on the imputed income from housing and the preferential tax treatment of capital gains on their principal residence. The ability to use deductible mortgage debt to finance purchases provides homeowners another tax advantage relative to renters. Figure 1 plots the percentage change in * Putnam Investments, One Post Office Square, Bos on, MA 02109 (e-mail: dean_maki@putnaminv.com). This paper was completed while I was on the staff of the Board of Governors of the Federal Reserve System. Financial support from the Stanford Institute for Economic Policy Research and the Lynde and Harry Bradley Foundation is gratefully acknowledged. I would like to thank John Shoven, Orazio Attanasio, John Pencavel, Tim Bresnahan, Anne Royalty, Doug Bernheim, Al Teplin, Craig Furfine, Martha StarrMcCluer, Raphael Bostic, Len Burman, Julia Coronado, two anonymous referees, seminar participants, and the Financial Institutions Research Review Group for helpful comments. The views expressed in this paper are those of the author and do not necessarily reflect the views of Putnam Investments or the Federal Reserve Board or its staff. 1 In this paper, consumer interest refers to interest paid on loans that are not secured by a residence. 2 Under TRA 86, interest paid on qualified educational and medical debt secured by a home was also deductible, even if this debt exceeded the household's basis. This provision was not renewed in OBRA 87. Under OBRA 87, home equity debt also could not exceed the difference between the fair market value of the home and the amount of acquisition debt, even if this difference was less than $100,000. 3 Of course, homeowners can also increase their mortgage debt by taking out a traditional home equity loan, by taking cash out when refinancing their mortgage, or by taking out a larger mortgage when they Durchase a home.

Women, Taxes and Benefits: A Critique of Cuvillier's Proposals

This comment examines proposals set out in this journal (Cuvillier, 1993) for taxing the imputed incomes of housewives in order to remove favourable treatment by the tax and benefit system which is an incentive to their remaining in the home. It briefly outlines Cuvillier's thesis and proposals and offers a critical assessment of the reforms she recommends. It finds that though the analysis of the problem is lucid and persuasive, the proposals are impracticable, unfair and largely irrelevant. It concludes that the distortions which affect women's choices about working outside the home are not implicit tax and benefit subsidies but obstacles: lack of affordable childcare and poverty traps in the tax and benefits systems.

The Distribution of Housing Tax-expenditures and Subsidies in an Urban Area

This paper examines the distribution of housing tax-expenditures and subsidies among households in the owner-occupied and public-rented sectors in the Birmingham area, UK. Subsidies to tenants are defined as the difference between market rents and the rents actually set. Tax-expenditures to owner-occupiers are defined as the absence of tax on imputed rental income and capital gains. The results presented indicate that tax-expenditures tend to be more regressively distributed than subsidies to tenants arising from non-market pricing. The benefits from the latter are more dependent on a household's location and property type than on income. The paper concludes that efficiency and equity objectives are not met by the current housing finance system.

Taxing Imputed Income from Owner‐Occupation: Distributional Implications of Alternative Packages

The tax treatment of housing has been a subject of continuing debate in the UK, as in many other countries. Economists have often pointed to the exclusion of imputed income from owner-occupation from the income tax base as a major distortion. As a result, a tax on the imputed income of owner-occupiers has been one of the perennial suggestions for ‘root-and-branch’ reform of the tax treatment of housing. But there has been a dearth of empirical analysis of the distributional effects of such proposals. This paper aims to fill that gap. Thus it models the distributional effects of taxation of imputed rental income, and of some proxies to such a tax.

A HAIG-SIMONS-TIEBOUT COMPREHENSIVE INCOME TAX

This paper argues that if we wish to have a comprehensive income tax, and if the Tiebout model is a reasonable approximation of the structure of local government, then the implicit income from the local public capital stock must be included in the tax base. In a pure Tiebout world, there are no important differences between publicly owned capital (e.g., streets, parks, schools) and privately owned capital (e.g., owner-occupied housing). Therefore the imputed income from the street in front of a family's home must be included in the base of a comprehensive income tax, just as the implicit income from the home itself must be included.

Economic status and role of hunters in a modern Inuit village

AbstractThe cash revenues and imputed incomes from country food harvests were calculated from interviews with eight full-time hunting and ten wage-earning Inuit for 1984 at Holman, Northwest Territories. Using a substitution value of Can$10.56/kg ($4.79/lb) for country food harvests, the combined income (cash + imputed food value) of the two groups was very similar. Full-time hunters produced country food at $1.01/kg ($0.46/lb). while wage earners spent $5.7 I/kg ($2.59/lb) on their harvest. Full-time hunters harvested surpluses of food which would feed another fourpeople outside their immediate family. Wage earners ended the year with almost twice the cash balance of full-time hunters, whose main monetary revenuecomes from guiding trophy hunters. The precarious cash economy of the full-time hunters who provide a significant part of the food for the village should be a subject of concern and attention when considering the future well-being of the northern economy.

Multivariate Measures of Well-Being and an Analysis of Inequality in the Michigan Data

We demonstrate a multidimensional approach for combining several indicators of well-being, including the traditional money-income indicators. This methodology avoids the difficult and much criticized task of computing imputed incomes for such indicators as net worth and schooling. Inequality in the proposed composite measures is computed using relative inequality indexes that permit simple analysis of both the contribution of each welfare indicator (and its factor components) and within and between components of total inequality when the population is grouped by income levels, age, gender, or any other criteria. The analysis is performed on U.S. data using the Michigan Survey of Income Dynamics.

A microsimulation model of Swedish housing demand

This paper presents a microsimulation model of housing demand aimed at analyzing effects of changes in tax schedules. Like many other countries, Sweden's income tax laws treat homeowners and renters asymmetrically. Therefore most changes in tax laws will affect housing demand and tenure choice. We develop a microsimulation model which generates consistent estimates of the mean and variance of total housing demand and show that commonly used measures like analytic elasticities evaluated at mean values of the exogenous variables can yield very misleading predictions. Our model can be used to simulate almost any change in the tax system; here we report results of three simple experiments, one of which is a change in the rate at which imputed income from owner-occupied housing is taxed.

SATELLITE ACCOUNTS: A RELEVANT FRAMEWORK FOR ANALYSIS IN SOCIAL FIELDS

Social fields are areas of analysis in which one finds both market and non‐market production and situations where indirect means of financing are used, in that expenditure is made by a third party rather than by the consumer.The borderline between these two spheres changes with time and from one country to another, but often when a system of third party paying is in practice, the difference is hardly noticeable for the beneficiary. On the other hand, the central framework of national accounts introduces a complete dichotomy of these two situations.In order to obviate this drawback, the national accounts have proposed two solutions. The first leads to having appear on the accounts of households only the expenditure made by them and not the figure of their consumption. Contrary to this is a second solution whereby the consumption account of households is extended to include the non‐market services received directly, and a corresponding imputed income appears.This second solution makes possible a richer analysis. However, it calls for the use of fictitious circuits and this often creates problems in the choice of a recording time. Furthermore, the number of circuits chosen has to be limited if they are to he the object of international agreement.The French system of satellite accounts seems particularly well suited to a truly thorough description of these phenomena. In fact, the analysis is carried out from a tripartite point of view of the producer, the beneficiary and the financer (i.e. the third party who takes on the expenditure). In this system, the functional perspective based on the study of the beneficiary of the expenditure can be analysed in greater depth than in the central framework of national accounts.Thus satellite accounts represent a complementary solution for the processing of problems inherent to these fields.

Tax treatment of housing in a dynamic sequenced general equilibrium model

This paper evaluates the efliciency effects of possible changes in the tax treatment of housing using a dynamic sequenced general equilibrium model based on Canadian data for 1972. Our model is similar in structure to that used by Fullerton, Shoven and Whalley (FSW) (1983) to analyze the impacts of a switch to a consumption tax in the United States, except that we include two assets rather than one. The motivation for the paper arises from existing literature on the treatment of housing under the income tax. Most of this literature emphasizes the non-taxation of imputed income from owner-occupied housing as a deviation from the Haig-Simons concept of income, and approaches taxation of housing as a static resource allocation issue. This implicitly argues for the inclusion of imputed income in the income tax base and suggests that a welfare gain would result.’ When viewed from a dynamic perspective, one’s perception of the appropriate tax treatment for housing correspondingly changes. Evaluated relative to a pure consumption tax rather than a pure income tax, housing is appropriately treated if imputed income goes untaxed since the income stream to the asset is not further taxed once the asset has been purchased. The intertemporal misallocation problem arises not with housing, but from taxation of non-housing capital income. This issue is, however, more complex than this discussion indicates because of inter-asset distortions arising from the differential tax treatment of housing

Aggregate consumption and allocation of time

In contrast to previous studies, this paper includes an investigation of the effects of changing female labor force participation on a macroeconomic rather than microeconomic level. Specifically, it looks at the effects on aggregate consumption of changing family allocation of time between market work and non-market, home production. The composition of income, between labor and asset income, and between market and imputed income, is shown to be a significant determinant of aggregate consumption. Further, home production and market consumption are shown to be complements rather than substitutes and female labor force participation has an effect on consumption in addition to, and independent of, an income effect.

A general proposition on the design of a neutral business tax

A simple and general means of levying a business tax that is ‘neutral’ in the sense that it does not affect the firm's decisions at the margin is discussed. In particular, we analyze the effect of a business tax of our design on the investment decision of the firm. The well-known ‘imputed income’ and ‘immediate write-off’ methods of levying a neutral business tax are found to be special cases of our general tax design. The implication of our results is that a neutral ‘pure profits’ tax can be levied without the informational difficulties of the imputed income method or the cash flow disadvantages of the immediate write-off method.

An Analysis of the Distributional Impact of Imputed Rent Taxation*

This paper examines the short‐run distributional implications of withdrawing the implicit subsidies which accrue to owner‐occupiers through the non‐taxation of their imputed income. It is argued that the distributional implications of taxing imputed income from owner‐occupied housing depend on the interaction of house value, equity and income over the life cycle of the owner‐occupier and that a failure to take all of these factors into account could result in a policy of imputed income taxation having unintended distributional effects within the owner‐occupied sector. The revenue gained from the introduction of such a policy, however, would be more than adequate to offset these effects.

Economics of Home Activities

This paper explores the contribution of unpaid home activities to the economic welfare of the family. It begins with a review of the conventional economic framework on how household decisions are made. It deals with the modifications which take into account unpaid work in the home. The concept of ‘imputed income’ from home activities (like housework and child care) is then introduced before several possible methods of measuring that income are assessed. The final section of the paper analyses some policy implications which follow from recognizing imputed income as part of family income.

A Residential Interest Deduction as a Potential Approach to Taxing Imputed Rent

The non-taxation of homeowners' imputed net rental income is recognized as inequitable and non-neutral, but is often felt to be unavoidable for practical reasons. It may be feasible, however, to tax imputed rental income indirectly if tax deductions were allowed for the residential interest expenses of both tenants and homeowners with the offsetting personal income tax rate adjustments made in a distributionally neutral fashion. That such a provision would improve tax equity is demonstrated with Canadian data. Allowing such deductions in Canada would facilitate homebuying by admitting many more families to the market although homeownership would ultimately become more expensive.

Efficiency aspects of the differential tax treatment of market and household economic activity

Recasting the traditional concern over the failure to tax items such as the imputed income from owner-occupied housing and housewives' time in general equilibrium terms, we estimate a rough lower bound on the welfare cost of the reallocation of capital and labor between the home and market induced by the current tax system. Even without accounting for intrasector and intertemporal substitution possibilities, the current U.S. tax system induces a welfare cost on the order of $20–40 billion. Analysis of the second-best optimal tax structure when household labor cannot be taxed reveals that neither equal taxation of capital nor a market sector value-added tax – two common prescriptions to improve resource allocation — is optimal. Finally, substituting a market value-added tax for the property tax dramatically worsens the allocation of resources.

Burden Distribution of a Broad-Based Personal Income Tax System and Its Implications for Tax Reform Discussions

Recent tax reform discussions have centered around two major areas of concern: first, the income base subject to the income tax, and, second, the rate at which income should be taxed.' As an alternative to the present income base definition, some proponents of reform have suggested a broader base that closely approximates the Haig-Simons definition of income.2 This approach involves the inclusion in the base of some presently excluded income items such as interest on state and local bonds, gifts, bequests, devises and inheritances, and so forth; the recognition of appreciation and depreciation in the values of property as income subject to tax; and, finally, the addition to the base of items of imputed income attributable to property ownership or service-yielding assets (for example, imputed rent on owneroccupied houses). With respect to the rate structure, however, little agreement exists among tax reform advocates on the proper rate structure or how the present rate structure might be modified. Galvin, Ture, and Stockfisch3 have suggested the substitution of a flat (proportionate) income tax rate for the existing progressive rate structure. A flat rate would eliminate distortion caused by progression, eliminate the need for relief measures for those taxpayers subject to higher rates, eliminate the bunching problem, and lead to simplification of the tax code. These arguments and the fact that rate progression cannot be justified on a sound theoretical basis make a flat rate structure appealing. However, such a proposal must also be evaluated in terms of the differential incidence of this tax system as opposed to the present one-that is, how many gain and how many lose by the substitution, and how the gainers and losers are distributed by income class. The purpose of this paper is to present empirical evidence on the distribution of