Economic income is a measure of how much your financial power grew over a period, defined as everything you consumed during that period plus any change in your net worth. It comes from the Haig-Simons formula used in economic research, and it is deliberately broader than the “income” number that appears on a federal tax return. Wages and interest count, but so do unrealized stock gains, the value of living in a home you own, gifts you received, employer-paid health insurance, and government benefits like SNAP or Medicaid. Anything that increased your capacity to buy goods and services is in.
The Haig-Simons Formula
The working definition traces to economist Robert Murray Haig, who in 1921 described income as “the money-value of the net accretion to economic power between two points of time,” and to Henry Simons, who in 1938 reframed it as consumption during a period plus the change in net worth over that period.1Cornell Law School LII / Legal Information Institute. Income | Wex | US Law The formula reads simply: Income = Consumption + Change in Net Worth.
Consumption here means the market value of everything you used up in the year, from rent and groceries to travel and medical care. Change in net worth captures growth in your assets minus liabilities, whether or not you sold anything. Spend $50,000 on living expenses while your net worth rises $10,000, and your economic income was $60,000. If your net worth fell by $8,000 instead, your economic income was $42,000, even if your paycheck never changed.
The formula does not care where the value came from. Salary, dividends, an inheritance, a jump in your home’s appraised value — all of it counts if it made you better off. That breadth is why economists use Haig-Simons as the benchmark for studying living standards and distribution, even though no government taxes it directly.
How It Differs From Taxable Income
Federal tax law defines gross income as “all income from whatever source derived,” which sounds close to Haig-Simons.2Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined The resemblance ends there. Dozens of statutory exclusions, deferrals, and deductions shrink the taxable base well below the economic measure.
- Unrealized gains. A stock that doubles in value is economic income the moment it doubles. The tax code waits for a sale.
- Gifts and inheritances. Haig-Simons counts every dollar the recipient receives. Federal law excludes them from the recipient’s gross income entirely.3Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances
- Employer-provided health insurance. Premiums your employer pays raise your economic well-being but are excluded from wages on your W-2.
- Imputed income. Living in a home you own, or growing your own vegetables, produces real economic value. The tax code ignores it.
- Government transfers. Medicare, Medicaid, SNAP, and housing subsidies all raise a household’s consumption capacity. Most stay out of adjusted gross income.
A Treasury Department analysis found that roughly 39 percent of income measured under a broad economic definition was excluded or deferred from the federal tax base, largely because of these gaps.4Treasury. Working Paper 109 – Using a Reconciliation of NIPA Personal Income and IRS AGI to Analyze Tax Expenditures That is why two people with the same economic income can owe very different amounts of tax.
Unrealized Gains and the Realization Rule
The single largest gap between economic income and taxable income involves assets that have appreciated but have not been sold. Under Haig-Simons, a $100,000 rise in your brokerage account is $100,000 of income the year it happens. The IRS only computes gain when there is a “sale or other disposition,” measured as the amount realized minus your adjusted basis.5Office of the Law Revision Counsel. 26 USC 1001 – Determination of Amount of and Recognition of Gain or Loss
This realization requirement has deep legal roots. In Eisner v. Macomber (1920), the Supreme Court held that stock dividends were not taxable income because nothing had been “severed from the capital,” defining income as “the gain derived from capital, from labor, or from both combined.”6Justia US Supreme Court. Eisner v. Macomber, 252 US 189 (1920) Economic theory rejects the distinction. A portfolio that grew by $100,000 made its owner $100,000 wealthier, and whether they convert that wealth to cash is a personal choice, not a change in economic position.
The Stepped-Up Basis at Death
The realization rule matters most when the owner dies. Under IRC Section 1014, inherited property receives a basis equal to its fair market value on the date of death.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired from a Decedent Stock bought for $50,000 and worth $500,000 at death produced $450,000 of economic income across the years it accrued. The heir’s basis resets to $500,000, and a sale the next day generates zero capital gains tax. Decades of accrued economic income permanently exit the tax base.
Buy, Borrow, Die
Wealthy holders can turn the gap into a strategy by never selling. Buy assets that appreciate, borrow against them to fund spending, and hold until death so the stepped-up basis erases the gain. Loan proceeds are not income under the tax code, because a loan creates an equal obligation to repay. Borrowing $10 million against a stock portfolio delivers the same spending power as selling $10 million of stock and triggers no tax.8The Budget Lab at Yale. Buy-Borrow-Die – Options for Reforming the Tax Treatment of Borrowing Against Appreciated Assets
Yale’s Budget Lab estimated that for a typical wealthy taxpayer expecting to hold gains until death, the effective tax rate on funding consumption through borrowing is 0.0 percent, compared with 11.7 percent for funding consumption through asset sales. That gap exists entirely because of the realization rule; under Haig-Simons, both paths would reflect the same income the moment the underlying assets appreciated.
Imputed Rent and Non-Cash Benefits
Economic income also captures value received without any money changing hands. The biggest example for ordinary households is imputed rent, the value a homeowner effectively receives by living in their own property. A house that would rent for $2,500 a month delivers $30,000 in annual housing consumption to its owner. A renter with the same salary paying $30,000 in rent has the same living standard but less money left after taxes. Haig-Simons treats both as receiving $30,000 in housing services. Only the renter had to earn taxable income to pay for it.
Self-provided services follow the same logic. Fixing your own plumbing, servicing your car, or tending a garden replaces spending that would otherwise come from after-tax dollars. None of it shows up on a tax form, and all of it genuinely raises well-being relative to paying a professional.
Agencies that measure living standards take these items seriously. The Congressional Budget Office includes employer-sponsored health insurance, Medicare and Medicaid benefits, SNAP, and housing subsidies in its household income calculations because those non-cash transfers raise consumption capacity as effectively as a paycheck.9Congressional Budget Office. Reconciling the Official Poverty Measure and CBOs Distributional Income Data CBO’s approach sits closer to Haig-Simons than adjusted gross income does.
Real Gains Versus Nominal Gains
A last refinement separates real growth from growth that only reflects inflation. If your home rises in value by 5 percent during a year when the general price level also rises 5 percent, your ability to exchange the asset for a basket of goods is unchanged. Haig-Simons calls for subtracting inflation from nominal growth to arrive at the true change in economic power.
The federal tax code makes no such adjustment. Capital gains are taxed on the full nominal increase. Someone who bought an asset for $100,000 and sells years later for $300,000 owes tax on the entire $200,000 gain, even if half of it merely tracked a higher price level. During low-inflation stretches the distortion is small. When prices rise quickly, the tax code can end up taxing phantom income that represents no real improvement in the taxpayer’s position.
Why No One Taxes Economic Income Directly
If economic income gives a truer picture of financial well-being, the natural question is why it is not the tax base. The practical barriers have defeated every serious attempt.
- Valuation. Publicly traded stocks have a market price every second. A family business, a piece of farmland, or an art collection does not. Annual appraisals of every illiquid asset would be expensive, contentious, and easy to manipulate.
- Liquidity. Taxing unrealized gains forces people to find cash for a bill on wealth they haven’t converted to money. A farmer whose land appreciated by $200,000 might have no way to pay without selling part of the farm.
- Measuring imputed income. Calculating a fair rental value for every owner-occupied home in the country, or a dollar figure for every garden tomato and home repair, would cost far more to administer than it would raise.
- Double counting. Any increase in net worth that isn’t consumed this year will eventually become consumption in a future year. Taxing both the accumulation and the later spending can count the same dollar twice.
No country has implemented a comprehensive Haig-Simons income tax. The concept stays useful as a benchmark: a way to measure how far the actual tax base deviates from a theoretically complete definition of income, and a way to judge whether those deviations are deliberate policy or accidental loopholes.