Using Human-Capital Theory to Establish a Potential-Income Tax

There are good arguments for an individual income tax on potential income, but a drawback to such a tax is the significant administrative concern regarding its implementation. This paper argues that human-capital theory provides a widely accepted and straightforward method to estimate potential income using observed characteristics of individuals, and operationalizes this approach using data for the U.S. The paper also suggests that a potential-income tax is very similar to a presumptive income tax. The paper concludes by reviewing some significant problems with the implementation of a potential or presumptive income tax.