Defining corporate income in terms of expected cash flows to shareholders implicitly builds in a distinction, unrelated to the Haig-Simons income concept, between debt and equity. In effect, payments to debt-holders but not equity-holders are deducted from the measure. The rationale for this distinction is simply one of convenience. In the polar cases of simple debt and equity, the former is a fixed return with priority rights, while the latter is simply a right to the residual profits. Thus, the former can be measured without regard to company-level performance, apart from the question of possible default, while the latter cannot. The existing treatment of debt and equity in U.S. tax law, whereby interest but not dividend payments are deductible to the payer although both are taxable to the recipient, is difficult to reconcile with optimal tax theory.
c) Current-year versus long-term focus – Haig-Simons income may sound very current period-focused, because it measures what happened during the current period. However, the fact that it counts changes in net worth makes it potentially infinite-horizoned. After all, any change in expected future net cash flows, no matter how small and deferred, has some effect on present value. Thus, a change in expectations regarding the future can affect currentyear income, if income is defined as broadly as the Haig-Simons concept suggests.
For individuals, the most striking implications relate to future earnings. We tend to think of individuals’ current year Haig-Simons income as depending on their current-year earnings, plus any current year saving, defined conventionally in terms of financial assets. As Louis Kaplow has noted, however, a Haig-Simons approach to human capital would imply taxing people currently on all changes in the present value of their expected future earnings. Thus, a currently unemployed full-time law student would have current Haig- Simons income from the increase in her future earnings’ present value as she moved one year closer to graduation. She would have even more current Haig-Simons income if good grades, or her making law review, increased her future earnings prospects. This is at variance with how even strong proponents of Haig-Simons income taxation typically view the ideal income tax system.