Haig-Simons Taxes: Is the tax system unfair to paid labor?

Sometimes economics blows your mind.

There’s an idea in economics of what fair taxes should look at.  There are several concepts of fairness, including vertical and horozontal equity.  We’ve talked about why there are progressive marginal tax rates before.

Back to the concept that messes with your mind.

“Ideal” taxes are termed Haig-Simons taxes (technically it’s taxes under the Haig Simons Income Definition… but that’s a mouthful).  These suggest that if unpaid work is equivalent to paid work, it should be taxed equivalently. The idea being that by its nature, the tax code discourages work that produces income (generally for elastic secondary earners) even though it should be treating it neutrally.   So there shouldn’t be a tax advantage to cleaning your own floors–or rather, there shouldn’t be a tax penalty to paying someone else to do so.

Would SAHP be willing to be taxed at 150K or whatever the going rate on salary.com is that year? Probably not. Not what we call politically feasible.

So what we do instead is dependent daycare credits or tax exemptions for childcare, but they only cover a fraction of daycare most places and they have their own problems with changing people’s behavior. And that’s only daycare.  What about the tax advantage to building your own deck rather than paying someone else to do it?

Of course, the tax system is also used to change behavior on purpose– to decrease negative externalities (ex. second hand smoke) and increase positive externalities (ex. giving to charity), and sometimes bleeding heart liberals add a little paternalism in there to keep people from harming themselves (libertarians say let them harm themselves!)  So those uses of the tax system are not included in Haig-Simons.

What do you all think?  Given that we tax labor market production (you know, to fund defense and other public goods), is it unfair to tax labor market production but not home production?

34 Responses to “Haig-Simons Taxes: Is the tax system unfair to paid labor?”

  1. Hannah Says:

    How, in practice, would you tax unpaid labour, given that no money changes hands?

  2. nicoleandmaggie Says:

    People would probably have to report it. Depending on what it was there would be clues for audits. I’m sure they could figure something out that would work equally as well as the taxes people are supposed to pay on their nannies.

  3. Kellen Says:

    Economically, would it have the same overall effect to allow people to deduct the cost of what they pay to their house cleaner/child care? That way, they are “saving” less money by staying at home with the child, rather than working and paying for day care.

  4. Cloud Says:

    I personally think we should stop giving people like me the day care tax credit- it is so small compared to what I pay for day care that it makes almost no difference in our financial situation- and increase the amount we give to families for whom the day care expense is a true hardship.

    What would happen to all the unpaid labor stay at home parents provide in our schools under that tax scheme? Is that taxable or a is it a charitable donation?

    • nicoleandmaggie Says:

      Haig-Simons doesn’t include positive externalities like giving to charity. There’s definitely an argument that if we don’t tax monetary charitable donations then we shouldn’t tax time charitable donations either. That isn’t fair. But with the externalities part of taxes (which isn’t included in H-S) we don’t really care about fairness but about efficiency– what is the most efficient way to make the pie as big as possible so social welfare is maximized.

      So under H-S, charitable time donations should be taxable. If we care about positive externalities, then they should be given a tax break to encourage them, if that break is more cost effective than the taxes we would be receiving. (Currently the tax break on paid donations is more cost-effective for providing public goods than the taxes we lose out from having it.)

  5. Linda Says:

    It seems to me this can get really complicated.

    I’m already confused by the tax code stance on bartering. As I understand it, bartering is taxable, but I’m not sure how a person is supposed to report it or how the IRS can enforce it. I guess that means that people who have “work exchanges” for things like home remodeling or babysitting (as I think was suggested recently on The Simple Dollar blog) should be reporting this bartering activity on their income taxes, right? And if my neighbor mows a portion of my lawn and I give him eggs in exchange, is that supposed to be reported as a bartering exchange? Does it make a difference if we do this only sporadically or on a regular basis?

    How does one value home production? If a young adult living at home does housework instead of paying rent, for example, how would that get valued? If the housework is considered sub-par, does that mean that the value is less in the same way that unskilled or less-skilled labor is paid less than highly skilled labor? How would one determine the true value, then?

    I guess this is why the tax code is so convoluted.

    • nicoleandmaggie Says:

      All good questions. And yes, bartered stuff is supposed to be taxed. There may be limits so a one time egg for lawn deal isn’t taxed whereas a regular exchange might be (just like the nanny tax doesn’t kick in until you hit a certain payment level). You’d have to consult a tax attorney or accountant!

      We have similar issues valuing in-kind donations. We don’t really know what something is worth until it is sold, but they still put prices on things for tax purposes.

  6. fizzchick Says:

    I agree with Linda. How on earth is this supposed to be implemented? Would the government assume a labor and maintenance cost per square foot? If you and your neighbor have identical apartments but one of you is a slob and one is a neatnik, do you get the same tax break? Plus, if one of you earns $300/hr at your day job and one of you earns $30, is the value of an hour’s floor-scrubbing really supposed to be the same to each of you?

    • nicoleandmaggie Says:

      There’s a lot of other taxes that are difficult to implement that are law anyway (see other comments). Childcare is probably the easiest to implement– they could make a base assumption if you’re not using childcare that would cover everyone with kids under a certain age. Building a deck is more difficult, but home improvements can be measured. You can think of ways for different types of home production even if others are more difficult. They may not get it exactly right but they could get closer than what they have now.

      But should they? That’s an interesting question.

  7. Comradde PhysioProffe Says:

    Damn, this tax shitte is complicated.

  8. hush Says:

    What a fun exercise. In the US, we’re generally taxed on actual money transfers, requiring some sort of a receipt as proof.
    Trying to fit the work of SAHP’s into this “taxable event” framework seems impossible. Stretching a bit, maybe it would be most analogous to hobby income and losses, which can create taxable events. Tax peeps would have a field day. You’d have affluent people disclaiming the in-home work of their spouse, dependents suddenly disappearing from returns. Remember when folks used to list imaginary dependents in the days before actual SS#’s were required? Fun fun.

    • Cloud Says:

      But if we ever seriously considered implementing it, we probably wouldn’t hear so much about how unfair current tax law is towards families with a stay at home parent… Seriously, this is the first time I’ve come across the argument that tax law is unfair the other way! Interesting. (And shows how little I know about econ….)

      • nicoleandmaggie Says:

        Actually, the marriage penalty hits earners that make roughly equal amounts much harder than it hits earners in which one is the bread-winner because of marginal tax rates (our textbook has a nice example comparing George and Laura who each make 75K to Bill and Hillary in which Hillary makes 140K and Bill makes 10K). That’s another violation of Haig-Simons, but there’s really no way around it that satisfies multiple definitions of fairness (you can’t treat couples the same *and* treat individuals the same *and* have progressive taxation… one or two of those has to go).

        The H-S is kind of a neat concept– they generally don’t teach it in undergrad econ except in a public economics elective. Not something I’d thought about before the class. But it’s true, we do encourage home production by taxing out of home production but not home production.

        (The marriage penalty/reward they teach in multiple classes!)

  9. chacha1 Says:

    I don’t see how it’s possible to tax (in the sense of collecting money from) labor or production that does not involve money changing hands.

    Realisitically the only way to “tax” unpaid labor would be to require the unpaid laborer to contribute a percentage of their unpaid TIME to community service, wouldn’t it? e.g. the SAHP, instead of paying $$ tax of 12% on that imaginary $150K of income-equivalent, gives 12% of hir time to the public school or whatever?

  10. chacha1 Says:

    also … “we do encourage home production by taxing out of home production but not home production.” IMO this is a good thing. Serious digression following!

    I believe the view that GNP should be continually increasing has little utility for actual people – it is only useful for businesses organized around selling things. The financial world we live in has a very short and not very successful history, whereas a rural/agrarian economy wherein MOST production was home production has a very long history.

    People didn’t get rich, income insecurity was endemic, population mobility was mostly restricted to childless young adults, and generally the “standard of living” was what we would now consider subsistence poverty. But if more people had the tools for actual self-sufficiency we might also not see millions of people put out of work when the market for manufactured goods bottoms out. And self-sufficiency now, with the new technologies and knowledge base we have, would not have to look like the self-sufficiency of the frontier days.

    Anyway, I’m in favor of the tax code continuing to benefit people who do things for themselves. And I say that as someone who does practically nothing for herself. (I can’t even grow basil, much less plant a garden or raise chickens.) Frankly I think the economy as a whole benefits from the SAHP phenomenon because it opens up employment for people who want to work more than they want to have kids.

    • nicoleandmaggie Says:

      ooh, you should read Laura Vanderkam’s Lump of Labor Fallacy post.

      • chacha1 Says:

        Interesting, but I don’t quite get how it relates to this. People who voluntarily stay out of the paid workforce – whether through retirement, to go to school full-time, or to be a stay-at-home-partner of a person who IS in the paid workforce … just as they get counted differently for tax purposes, they get counted differently for employment-statistics purposes.

        And the availability of jobs for which these people are qualified doesn’t always bear on their decision to not work, right? As LV notes, people choose to stay out of the workforce for a LOT of reasons, only some of which have to do with paid compensation. And they move in and out of different jobs for an infinite number of reasons. But if a full-time worker decides to retire, go to school, or be a stay at home partner, then that worker’s job DOES, usually, open up for someone else.

        I don’t by any means believe that any two people could fill any two jobs, or that there is a set number of jobs, or that there is a set number of workers – which is how I’m reading the lump of labor thing. That would imply all we have to do is provide jobs and people will be there to take them. Clearly that is not the case because our economy currently has thousands of unfilled jobs. The skill set of our workforce no longer matches the skill set required by our employers. Which is a whole ‘nother can of worms.

        My issue relates specifically to the concept of the desirability of an expanding economy. I was just saying (in my inexact way), an expanding economy maybe shouldn’t be our primary focus when we are talking about the work people do and how it’s compensated (and taxed). That is, tax policy that discourages self-sufficiency in favor of encouraging an industrial labor market should maybe be the LAST option. Industrial labor markets are finite, location-dependent, and completely outside workers’ control.

        On further reflection, my sense is that the ONLY reason there’s discussion about taxing unpaid labor is because the people who choose to stay out of the labor force are still eligible for public benefits a.k.a. “entitlements.” Rather than finding a way to levy a $$ tax on the unpaid labor performed by such people it seems the simplest solution would be to charge all citizens a flat fee annually to fund their estimated future benefits. They could come up with the money however they want – a partner could pay it – but the idea of trying to financially quantify the contributions of every disemployed citizen is … kind of ridiculous.

      • nicoleandmaggie Says:

        Someone productive not working anymore doesn’t open up a job for someone else. There may be a job opening, but the replacement is likely to be less productive (both because they’re less experienced and because there are transaction costs to any change… and maybe because the employer picked a good person for the job to begin with, though maybe not). A less productive worker means there’s less surplus to go around. Enough of that and the economy contracts and there are fewer jobs, not more jobs.

        Sure, maybe GDP isn’t how we want to measure success for a country, that’s a philosophical/religious/moral discussion. Not my field of expertise so I’m not qualified to opine on it. But the idea that someone leaving a job means someone else gets a job… the idea that women shouldn’t work because they’re taking men’s jobs or old people should retire so young people can have jobs… those just aren’t true. Women not working doesn’t mean men have jobs. Old people retiring doesn’t mean young people have jobs. Productive people leaving employment means that the the economy contracts.

        That’s the lump of labor fallacy.

        So no comment on the other stuff… there isn’t a “right” answer to that. Some literature on happiness would agree with your point, but only after everyone has an income of say 75K or so, other literature on happiness would say income inequality is where we should be focusing to maximize happiness.

        If you think that somehow home production produces public goods or positive externalities, then you are correct that the government should be subsidizing it. I’m not sure that home production does. Other potential reasons for this government intervention are definitely more philosophical and not clean cut.

  11. mareserinitatis Says:

    “These suggest that if unpaid work is equivalent to paid work, it should be taxed equivalently.”

    I could only see this if unpaid work were being compensated equivalently. Also, it would discourage any one from having kids because they’d become liabilities in the eyes of the IRS.

  12. Linda Says:

    I’ve enjoyed following the thread about GNP/GDP. Like chacha1, I have similar questions/doubts about an expansion economy being the best thing since sliced bread. And that Lump of Labor post — while informative and well-expressed — doesn’t answer to my thoughts about expansion. It seems we humans have thought this way for a long time, though. Before the industrial economy shift we were expanding by putting more land under cultivation and taking over other territories for hunting, etc. We also had better natural checks in place, though, too. We’ve become much too good at keeping ourselves healthy enough to breed and breed and breed. Which is, I guess, an answer to my own question: Why is an expansion based economy so good? Because we keep producing more mouths to feed faster than we’re dying off.

    • nicoleandmaggie Says:

      All interesting philosophical questions.

      The lump of labor thing isn’t saying anything about what is better, just that if you make someone leave a job that doesn’t mean there’s a 1-1 exchange for someone who is unemployed. The economy shrinks when people leave the labor force. Forcing people out of work doesn’t give an equivalent number of out of work people new work.

      • nicoleandmaggie Says:

        Y’all should post on the concept! They’re interesting philosophical discussions!

        If not, I suppose I could deliberately controversial post it in a month or two. That’s a much less painful post than one about supposed scientists who use proof by ridicule when accusing other scientists of not using the scientific method about an empirical question.

        (Tomorrow’s deliberately controversial post is kinda liberal.)

      • chacha1 Says:

        I’m clear that 1:1 isn’t necessarily the way (and I could really use a more expert explanation, because I know a helluva lot more about physiology than I do about economics) … BUT: you know, I got my job because someone else got fired. A new job wasn’t created for me. The person who got my old job got it because I left, not because a new job was created for her. It’s the same number of jobs and the same number of employed people; my old job would have stayed available as long as it took to fill it. If Person B had decided to be a SAHP instead of taking my old job, Person C would have come along eventually. Is the very concept of labor equilibrium flawed (serious question)?

        Sorry, I know I am taking this way off the original track but I’m curious. :-)

      • nicoleandmaggie Says:

        Sometimes they fill the position. Sometimes they get rid of the position. Sometimes they take a tt position and turn it into several adjunct positions. In the aggregate, productivity is lost when someone who is doing a good job is replaced by someone less experienced or lower quality. Which is what happens when we force people to leave the labor force in order to “make jobs for [young white men]”.

        Person C might not have come along eventually. Person C might have sucked and caused the company to go under. Then the whole company’s worth of jobs would be gone. (And sure, bits and pieces would go to other companies or create new companies, but there’s transaction costs to that that reduce productivity.)

        You should ask Laura Vanderkam these questions– I think she does a much better job of explaining it to non-economists. I find it easier to think backward and to draw charts, but I thought she did a great job of explaining it the way people without economics background can understand (and over the internet since I can’t draw the graphs so well in ASCII).

        Trying to explain it to reporters has been difficult for me too (not recently, since they’ve moved on, but there was a good stretch of last year and the year before that I failed at explaining to reporters), which is why I sort of begged her to give it a try after reading her book.

  13. Linda Says:

    I get the Lump of Labor job thing. Chacha1, your personal experience can’t be extrapolated to cover all jobs in the country. It may be true that *some* jobs are 1:1 replacements, but it isn’t true that *all* jobs are 1:1 replacements. As a manager, I’ve been in the situation where I’m told that if I let someone go I won’t be able to replace that position, so I have first-hand experience with this. (Much too painful first-hand experience at times, too!)

    • nicoleandmaggie Says:

      We lost two tt lines this year…

    • chacha1 Says:

      I’m sorry if I am dense. I just do not think my question re: labor equilibrium has been answered. I KNOW my personal experience can’t be extrapolated, and I never said all jobs are 1:1 replacements. But the theoretical position seems to be deliberately ignoring what actually happens in a labor pool of roughly-equivalent potential employees competing for roughly-equivalent jobs – such as in my industry (law). People tend to stay employed by changing jobs because there isn’t a lot of “advancement” available at my level. They are replaced not by entry-level people, but by people at a similar level.

      Personally: the reason I left my last job was that I was not succeeding in it. The person who replaced me is, by all reports, happier and more productive there than I was. Just as I am happier and more productive in my current job than the person *I* replaced was. So a new employee coming into a position does not necessarily mean the overall level of production goes down, which is what the theoretical position seems to imply. All the “ifs” in the theory also seem to require that if one firm has to downsize, those jobs are gone forever, or the new jobs that laid-off employees go to are necessarily less “productive.”

      I’m perfectly clear that businesses and industries change over time – and they SHOULD. Not every employer should maintain every position forever. And not every employee should stay in a given job, or in the labor market, forever. (This is why I think rewarding self-sufficiency is not a bad thing for society.) Economic theory as I read it just seems to require that every job is perpetual in a “healthy” system, and that is not the case.

      Anyway, I will leave this now since I am probably annoying you. :-) Sorry and thanks for your tolerance!

      • nicoleandmaggie Says:

        You made a more productive match, and it sounds like your replacement did as well (those changes overcame the transaction costs of search and retraining). Those choices were made on a level playing field. That’s not the same as using tax law (or previously, marriage bars) to encourage women to remain out of the labor force or mandatory retirement to force older workers out of the labor force. Those kinds of changes push people out of society’s equilibrium. We want everybody to be employed at their most productive job match (where productivity can have a number of definitions, including happiness). Forcing/encouraging people out of productive job matches instead of allowing everybody to make decisions based on the same kinds of constraints leads to contracting the economy.

        Again, I do think Laura Vanderkam is a lot better at explaining the Lump of Labor fallacy without jargon etc. than I am.

  14. Funny about Money Says:

    Hm. This interesting exchange is a little over my head. But assuming I’m understanding the basic question (“should people who don’t work in the paid workplace be taxed on some theoretical value of the unpaid work they actually do”?), how do we assess who does what and what its value is?

    For example, the amount of work a stay-at-home parent with four kids does would be exponentially greater than the amount of work a parent with one child has. Similarly, if the family is affluent enough to hire babysitters and house cleaners, the SAHP’s workload would be significantly less than that of an SAHP who, by choice or for financial reasons, did not hire in-home help.

    Then we have the example of my friend who, shortly after her second child was born, fell down a set of stairs and injured her back so badly she could not care for her kids. She was a serial marrier of very wealthy men; the spouse of the moment hired a nanny to care for the children, and she went on about her business as a society wife and thoroughbred horse fancier. Should she have been exempted from such a tax because she was putatively unable to do the work?

    Or we have the SAHP who has a small business enterprise in the home while she rides herd on the kiddies — in my case, I was a freelance writer and part-time adjunct professor. Both enterprises are grossly underpaid; my businesses basically created a tax write-off for the corporate lawyer husband.

    And speaking of corporate wives, what parts exactly of an SAHP’s functions are to be assessed, and how exactly do we estimate their value? One of the many things a successful corporate wife does is to represent her husband in what we might call the nonprofit/charitable/volunteer arena: she serves as a de facto marketing agent for him by helping to raise his visibility in the community through her own volunteer activities. How much is it worth to serve as a volunteer chairman of a board? Of several boards? As a Junior League officer?

    What if she grows a garden in the backyard and provides most of the family’s produce with that activity? Should the value of the produce she farms be taxed? She scrapes the wallpaper off the old house’s walls and repaints them herself: does she get taxed for what it would have cost to hire a painter to redo a 3300-square-foot house?

    If she keeps her kids out of day care, should she be taxed on what it would have cost to put the kids in day care? On what it would cost to hire a full-time housekeeper & nanny? Or maybe she should be taxed not just on that but also on the savings in doctor’s bills and prescriptions that she would have had to pay to treat the endless series of infections day-care kids come home with?

    Should the parent who home-schools be taxed according to the per-pupil amount it costs the local public school district to educate children? Or according to the per-pupil cost of private school, since that’s essentially what she’s providing for her kids?

    As ideas go, it sounds invasive and tyrannical. The system’s unfair now, but substituting another unfair (and pretty much unworkable) system for what we have doesn’t seem like much of an improvement.

    • nicoleandmaggie Says:

      oh, as we said in the earlier comments, there’s plenty of not-so-workable taxes (and credits!) on the books already. For example, you’re supposed to pay taxes on bartering, but people don’t. But you’re still supposed to. Similarly figuring out the value of in-kind contributions– people make guesses and the government generally accepts them. They could come up with something that’s an approximation rather than nothing, perhaps a blanket amount given the number of kids etc. How isn’t really the question.

  15. Is GDP how we should be measuring success: A deliberately controversial post « Grumpy rumblings of the half-tenured Says:

    […] Chacha and Linda commented on an earlier post that they didn’t like the way that success of a country is measured by GNP (gross national product) or GDP (gross domestic product), basically how many goods and services are sold in an economy.  Having more goods and services doesn’t mean a country is doing better and focuses on materialism as a sign of success.  [They also talk about the lump of labor fallacy, but that's the subject of someone else's post.] […]

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