Imputed income is the accession to wealth that can be attributed, or imputed, to a person when he avoids paying for services by providing the services to himself, or when he avoids paying rent for durable goods by owning the durable goods, as in imputed rent.
Most countries, such as the United States, tax imputed income only in certain situations, such as the calculation of domestic partner employee benefits. Imputed income is sometimes difficult to measure, and doing so can have political consequences: for taxpayers, not taxing imputed income creates a tax benefit in favor of owning over renting, and in favor of self-service over hiring; for the economy, not taxing imputed income directs economic activity away from activities associated with extreme and severe division of labor.
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Home ownership is an example of imputed income from durable property. If someone lives in his own property, he foregoes the rental income on this property in exchange for not owing an equivalent amount of rent to someone else. He also avoids paying income taxes on that rental income. (In the specific example of home ownership in the United States, this effect is emphasized by allowing home owners to deduct interest on home mortgage debts when computing taxable income for U.S. federal income tax purposes.)
An example is a housewife who is not taxed on wages that the family implicitly "pays" her for her services; if she were working, the wages she might pay a hired employee would be taxed. This is a systemic unneutrality that is inevitable in any income tax; it favors "leisure" (including self-rendered benefits such as shaving and mowing one's own lawn) over "work" (services sold on the market for remuneration).[1] The concept of imputing income is logically extensible to any service people perform for themselves, such as cooking their own meals, washing their own laundry, or even bathing themselves.
Even though Internal Revenue Code has no provision establishing an exclusion, imputed income is not treated as income for U.S. federal income tax purposes.[2] "The exclusion is rather a matter of administrative practice, but no less firmly established for that reason."[3] Nevertheless, issues concerning imputed income arise with regard to working to provide for oneself. For example: would the produce grown and eaten by a farm owner be considered imputed income?[4] Likewise, would sweeping one's own floor instead of hiring a domestic servant or driving one's own car instead of hiring a chauffeur be imputed income?
In dicta, the Supreme Court has touched on the issue of the constitutionality of imputed income:[5]
If the statute lays taxes on the part of the building occupied by the owner or upon the rental value of that space, it cannot be sustained, for that would be to lay a direct tax requiring apportionment. The rental value of the building used by the owner does not constitute income within the meaning of the Sixteenth Amendment.[5]
However, it is not known whether the Court would still find a constitutional prohibition of imputed income today.[6]