The petitioners in Moore v. United States, No. 22-800, have argued repeatedly that income, as the word is used in the 16th Amendment, describes only realized income. “Common usage, court decisions, and learned commentary from before and after the Amendment’s ratification are aligned in understanding that income consists of realized gains,” they contended in their recently filed reply brief. (Prior coverage: Tax Notes Federal, Nov. 20, 2023, p. 1514.)
A weaker version of this claim would be true. Some of the brief’s listed sources certainly reflected the notion that realized income was the only sort taxable under the 16th Amendment.
“If it is not realized, there is no income,” intoned economist Edwin R.A. Seligman in 1916. Seligman was the most prominent tax economist of the 1910s, and in the realm of learned commentary, his opinion still looms large. (Prior analysis: Tax Notes Federal, Nov. 20, 2023, p. 1356.)
But as stated by the Moores, that claim is wrong. Seligman was not the only tax expert of the 1910s, and “learned commentary” on the meaning of income was uncertain throughout the early decades of the 20th century. Indeed, some of Seligman’s colleagues in the burgeoning field of public finance disagreed with his opinions about realization and its importance to the concept of income.
Dissenting Opinions
One of those experts was Robert Murray Haig.
Seligman’s opinion merits respect in any attempt to discern the original meaning of income as used in the 16th Amendment. But so does Haig’s; he was, after all, one of Seligman’s star pupils, having trained with him at Columbia University. After receiving his degree, Haig joined Seligman on the Columbia faculty and later succeeded his mentor as the McVickar Professor of Political Economy.
More to the point, Seligman and Haig shared an intellectual heritage. Both were members of what historian Ajay Mehrotra has called the “early Columbia school of taxation and development.” This intellectual tradition integrated the disciplinary insights of political science and economics to produce a powerful synthesis linking abstract theory to real-world governance. As Mehrotra phrased it, “Columbia political economists like Seligman did not just espouse ideas in an academic setting; they also set out to use their research to inform public policy.”
More often than not, Seligman and Haig were aligned on policy issues — but not when it came to the question of realization and its importance to the concept of income. It might be tempting to diminish Haig’s opinion, especially when cast against the ideas of his well-connected and influential mentor. Indeed, Haig was just starting his career in the 1910s when he and Seligman were debating the realization question; perhaps the young scholar had not quite reached intellectual maturity.
But it would be foolish to dismiss or belittle Haig’s thoughts on the meaning of income. After all, he went on to develop the famous Haig-Simons definition of income, arguably the most influential, enduring, and foundational tax concept to emerge during the 20th century.
Haig’s View of Income
In 1921 Haig published The Federal Income Tax, an edited collection of essays by leading tax scholars designed to assess the still-nascent federal income tax.
In his personal contribution, Haig began by noting that lawmakers were pretty much making things up as they went along. “Congress has, for eight years past, collected taxes upon what it has been pleased to term income,” he wrote. “In no one of the three statutes passed during that time has Congress attempted to formulate definitely a positive definition of income.”
Meanwhile, the courts had not provided much guidance either. “It is true that certain important items, notably stock dividends, which Congress has sought to include within the scope of the term, have been eliminated by court decisions,” Haig wrote. “Much more important items, however, await judicial consideration. Even such questions as the taxability of gains from appreciations of property values are still unsettled.”
The most serious problem, however, was the judicial tendency to narrow the definition of income. “Such decisions as have been handed down,” he warned, “appear to be leading toward a definition of income so narrow and artificial as to bring about results which from the economic point of view are certainly eccentric and in certain cases little less than absurd.”
A narrow definition was not just an abstract problem, irritating to economists but pleasing to taxpayers as they were removed from the taxman’s reach. The resulting injustices posed an existential threat to the income tax, Haig warned. If an income tax were to survive politically, it would have to make sense economically. As Haig phrased the imperative:
The concept of income is, after all, essentially an economic concept, and if the legal concept established by court interpretation under a particular constitutional provision or amendment departs in any very fundamental fashion from the economic concept, injustices may arise of such magnitude as to necessitate either the abandonment of the income tax or the adoption of a constitutional amendment which will give a positive and comprehensive definition of income.
For his part, Haig had already developed a “positive and comprehensive” definition. Notably, he believed that his economic understanding of the term would be recognizable to a layperson of the era. “In this case, as in so many others, the economist uses a term in approximately the same sense as it is used on ordinary discourse,” he wrote. “There has been no revolutionary contribution to economic thought on this topic since the passage of the Sixteenth Amendment. The economist and the man in the street both use the term now as they used it in 1913.”
At the most fundamental level, income consisted of a “flow of satisfactions, of intangible psychological experiences,” Haig continued. And he quoted Seligman to make his point. “We desire things at bottom because of their utility,” Seligman had written in Principles of Economics. “They can impart this utility only in the shape of a succession of pleasurable sensations. These sensations are our true income.”
Haig understood that this sort of definition, while popular with economists, was useless to policymakers. They needed a ready yardstick for measuring satisfactions — something “less diaphanous and elusive than these psychic satisfactions.” Conveniently, money allowed for exactly that sort of measurement.
All of which led Haig, eventually, to his famous definition: Income, he wrote, is “the increase or accretion in one’s power to satisfy his wants in a given period in so far as that power consists of (a) money itself, or, (b) anything susceptible of valuation in terms of money.”
Aware that such a formulation might still seem complicated, Haig offered an even simpler (or at least shorter) version: “Income is the money value of the net accretion to one’s economic power between two points of time.”
Generations of public finance experts have been grappling with that definition ever since.
Realizable, Not Realized
Haig’s definition required that an element of income (or an accretion to economic power, in his terms) must be “susceptible of valuation” in money terms. And by extension, “the valuation attached to the accretion must be sufficiently definite to form the basis for a realization. The item must be realizable and separable, certainly.”
But Haig rejected the idea — supported by Seligman, among others — that actual realization and separation must occur before an accretion could be counted as income. As long as the accretion was capable of separation, it could legitimately by treated as income and taxed. As Haig explained:
The economist when asked whether a particular item is income or is not income, must, in the opinion of the writer, make his reply depend upon whether the receipt of that item has increased the economic power of the recipient to command satisfaction-yielding goods or services. If it does, it is income; if it does not, it is not income.
Haig understood that his broad definition of income might pose administrative problems. It might be impractical to tax certain forms of unrealized income, such as the imputed rental value of owner-occupied housing or unrealized gains in the appreciated value of certain assets.
But while it might be reasonable to make administrative concessions to practical difficulties, it was not reasonable to frame those accommodations as a matter of principle.
“For example, one might urge that no tax be placed on a gain arising from the appreciation of a fixed asset until it is actually sold,” Haig wrote. “But the recommendation should not be urged on the ground that the appreciation is not income until it is sold. The economic fact is that the owner of that asset comes into possession of economic income whenever the increase in the value of that asset is sufficient in amount and definite enough in character to be susceptible of precise evaluation in terms of money.”
Haig deplored the increasing tendency to confuse administrative practicality with economic reality. “It is income whenever it is susceptible of evaluation in terms of money,” he reiterated. “Neither the economist nor the courts should express their opinions in the form of an assertion that it is not income.”
Dismissing Haig
The Moores have dismissed Haig’s expansive view of income, casting him as an ivory-tower economist, disconnected from the legal operation of the federal income tax and unconcerned about its constitutionality. Haig, they wrote in their reply brief, “recognized that the law did not embrace his preferred definition, which derived not from legal sources or common usage but his impression of ‘the economics of the problem.’”
Even more damning, according to the brief, Haig himself began his essay with an admission that “no attempt is made to evaluate or criticise the interpretation of the statutes or the Sixteenth Amendment by the courts from the point of view of general legal and constitutional principles involved.”
It is understandable that the Moores and their attorneys might have been confused by this statement, which reeks of false modesty. And it’s not clear why Haig felt the need to include his disingenuous disclaimer. But the Moores might have been less confused if they had glanced upward on the page to revisit the title of Haig’s essay, which provided a subtle clue to the author’s more ambitious, legally inflected intentions: “The Concept of Income — Economic and Legal Aspects.”
Also, the Moores might profitably have chosen to read beyond the bottom of the essay’s first page, since Haig repeatedly engages, evaluates, and criticizes legal interpretations of the 16th Amendment in passages throughout the article.
Broadly speaking, Haig understood that abstract economic theory was often impractical when it came time to draft workable tax laws. But he also believed — like other members of the Columbia school of taxation — that laws should be constructed on a sound theoretical foundation, especially since crucial questions of fairness often hinged on economic theory. As noted earlier, he believed departures from sound theory could pose a threat to the income tax’s survival.
And contrary to the Moores’ assertion that Haig was indifferent to legal and constitutional questions, the young economist engaged them specifically and directly. “To the writer it seems unfortunate that the questions as to the constitutionality of the federal income tax on specific items are turning so largely on the question as to whether the items are or are not income,” he wrote, throwing obvious but unstated shade on the Supreme Court’s recent decision in Eisner v. Macomber, 252 U.S. 189 (1920). “The items most controverted certainly fall within the definition of income established by the analysis of business facts made by both the economist and the accountant.”
Finally, Haig pleaded with lawmakers and the courts to embrace a definition of income that was both broad and flexible, approximating as nearly as possible his ideal economic definition. “The definition of income should rest on fundamental economic principles,” he wrote. “The definition must be broad enough to iron out all the theoretical difficulties and solve all of the inequities and anomalies.”
Most of all, Haig argued passionately that the legal definition of income should remain malleable. Indeed, that was the nature of the idea itself. “The concept of taxable income is a living, mutable concept which has varied widely from time to time and from country to country with the conditions under which it has had to operate,” he wrote. Going forward, U.S. lawmakers should embrace this malleability, since it allowed for continual improvements in the nation’s premier fiscal device.
“The situation should be held in a mobile, flexible state which will permit the statutory definition of income to become progressively more precise and accurate with the improvement of the technique of our economic environment,” Haig wrote.
Aligned About Uncertainty
When the Moores claim that historical sources from the early 20th century were “aligned” on the meaning of income, they are engaged in a gross exaggeration. The public meaning of income in the 1910s was marked by uncertainty, not alignment.
Haig and Seligman should serve as useful reminders of this uncertainty — not least because they remarked on it. In a 1921 introduction to Haig’s edited collection, Seligman bemoaned the “lack of unanimity” among tax experts around key questions of income taxation.
“On every side,” Seligman wrote, “we are confronted with problems bristling with difficulties, into which the economist has thus far put scarcely more than an entering wedge and without a successful treatment of which the legislator must necessarily flounder.” In a list of these uncertainties, Seligman specifically raised the question of realization and its importance to the concept of taxable income.
And in his own essay, Haig agreed with his mentor, observing that the meaning of income was deeply uncertain in 1920. Both taxpayers and policymakers were burdened by the “unsettled status of the definition and the wide differences of opinion which exist as to what the term income, as used in the Sixteenth Amendment, did, does, or ought to mean.”
If two experts on differing sides of the realization question could agree that the meaning of income was uncertain, perhaps we could conduct the debate over Moore without any more rhetorical grandstanding about the supposedly aligned opinions of the 1910s and 1920s.