Question

3. Compare and contrast the following terms a. Haig Simon income vs. adjusted gross income vs. taxable income b. Tax credit vs. tax deduction c. Standard vs. itemized deduction d. Deduction vs. exemption e. Progressive vs. proportional vs. regressive tax structure

Answer 1

(a): Haig-Simons income is an income metric that enables measuring the economic well-being. Haig-Simons income is represented by the following formula: Income + consumption = change in net worth. On the other hand adjusted gross income is that measure of income that is calculated from a person’s gross income and is used to determine the amount of income that is taxable for a person. Taxable income is that income that is used to compute the amount of tax that an individual or a company owes.

(b): Tax credit is that amount that taxpayers can deduct from taxes owed to their government. It is a form of tax incentive. Tax deduction is a deduction that lowers a person’s tax liability. A tax deduction lowers a person’s taxable income.

(c ): Standard deduction is the amount that non-itemizers can deduct from their income before income tax is applied to their income. A tax payer can chose either standard deduction or itemized deduction. Itemized deduction is that expenses on eligible items that can be deducted from a person’s AGI i.e. adjusted gross income. Thus is claimable in place of standard deduction and an individual selects either standard deduction or itemized deduction depending on which leads to lower taxation.

(d): Deduction means subtraction and this amount reduces the amount of taxable income. On the other hand exemption leads to exclusion i.e. if a certain income item is exempt from tax then it will not contribute to a person’s total income.

(e): In a progressive tax structure the tax rate will increase as the taxable amount increases. In a proportional tax structure the same percentage of tax will be applied on all tax payers irrespective of their income level. In a regressive tax structure the tax rate will decrease as the taxable amount increases.