Question

What is comprehensive income? How is it related to an individual’s command over resources? Why would a comprehensive income tax eliminate the need for a separate tax on corporate income? What distortions are introduced by a general tax on comprehensive income?

Answer 1

Comprehensive income is a statement of all income and expenses recognized during a specified period. The statement includes revenue, finance costs, tax expenses, discontinued operations, profit share and profit/loss. Most firms report comprehensive income in a separate statement from income resulting from owner changes in equity but have the option of providing information in a single statement.

General income taxes impose a second distortion by driving a wedge between before- and after-tax returns on capital. This discourages saving by discriminating against future relative to current consumption, reducing welfare by leading to a sub-optimal level of intertemporal resource transfers, while tending to lower investment and thus the domestically-owned capital stock, potentially reducing productivity growth. Although technological change and the increase in labour supply determine the rate of economic growth in the long run, many believe it possible, by reducing the rates of capital taxation, to induce faster growth for a time through an increase in investment2. The investment incentives that exist in many countries have been designed in part for this reason. In some countries, however, there is concern that these have gone too far, with capital being unduly favoured at the expense of labour so that investment has become labour replacing.