TRANSACTIONS OF THE SECTIONS. 215 



On Income Fallacies and some of their Consequences. By P. Hallett, M.A. 



The object of this paper is to sliow that the word "income" has unequal 

 nieauings and values in its applications to diiferent sources, and that therefore its 

 use as a comparative measure either of wealth or taxation without previous correc- 

 tion must necessarily lead to error. These inequalities arise from the unequal 

 degrees in which ditl'erent sources are natm'ally reacted on in the production of 

 incomes, and from the variable manner in which these reactions are recognized by 

 present modes of assessment. Nominally equal incomes are only really equal 

 when they leave the things that produce tliem, considered as values, equally 

 imimpaired, or when they leave them equally restored. £100 of income produced 

 by a source that remains permanent in value is a very different thing from £100 

 produced by a som-ce that is consumed in and by the veiy process of its production. 

 To yield the one may require a capital value of £2000 ; the other may arise from a 

 value varying from below £2000 down to even less than the £100 of income itself, 

 simply according to the rate of the source's consum ability. But the two are 

 called equal incomes, and are treated as equal both in statistics and legislation. To 

 incomes that leave their sources unimpaired belong the ordinary interest of money 

 and, with some slight drawback, the rent of land. To those that consume their 

 sources belong terminable annuities, the royalties of mines, the rent of houses, the 

 income or wages of laboiu- in its various forms, in all of which the income is 

 increased at the expense of the som-ce. In the one category the income is a pure 

 profit on the source's capital value ; in the other, besides piu?e profit, it contains 

 the repair and redemption-fimds of its capital value, or, in other words, is a mixture 

 of profit and capital. 



Different classes of income thus being of rmequal constitution, their units are 

 necessarily of unequal denomination, and are therefore, as such, incapable of being 

 added, subtracted, or of forming comparative ratios. Various fallacies arise from 

 ignoring these inequalities. (1) In estimating, for example, the National Income, 

 land-rent, house-rent, industrial and professional incomes, and even common wages, 

 have all been added together as if the income units of each class were of the same 

 value; and the incongruous mixture has even been capitalized at pure interest rates 

 in order to obtain the increment of National Wealth. (2) Again, in estimating the 

 comparative incidence of General Taxation on different classes of persons or pro- 

 perty, the same oversight has been committed. Income, according to the ordinary 

 rule, has been taken as the comparative measm-e of incidence, but the measure not 

 being of common value in different classes the comparison fails radically. If one 

 class of incomes pays 11 per cent, of taxation and another class pays 14 per cent., 

 but the income unit of the one is of more than double the value of that of the 

 other, the percentages, without correction, are evidently scientifically worthless 

 and practically misleading. (3) The same error that thus applies to taxation in 

 general applies to the special Income-Tax ; and it is indeed probably owing to the 

 mode in which different denominations of income are officially defined and treated 

 in the income-tax administration that the preceding fallacies have arisen. 



_As these consequences (statistical and legislative) result from a want of unifor- 

 mity in the idea of income, their true remedy would appear to consist in supplying 

 this want ; and as the want arises from the unequal degrees in which the diiferent 

 sources are impaired through production, it would be supplied by restoring this 

 impairment. iSuch restoration will generally imply a deduction from the incomes 

 of terminating sources, as at present given, of repair or redemption funds sufficient 

 to make the capital value of these sources permanent. The soiu-ces being thus 

 rendered economically permanent the incomes would be permanent also, whilst 

 their units being of the same denomination might be added, subtracted, or em- 

 plOTed as comparative measures of taxation without error or injustice. 



If, using symbols, P be a source's production, E its productive expenditure or 

 consumability, I its true income or profit, then I will be determinable by the 

 formula I=P — E. Income will be thus universally definable as the difference 

 between production and its cost — the pure excess by production above capital, the 

 source's pure profit or permanent annual value. 



