Unearned income

This article is about a property of personal income. For the financial accounting term, see deferred income. For The concept of unearned income in economics, see Economic rent. For more specific term for income from the ownership of capital equipment or equity, see Property income.

Unearned income refers to income received by virtue of owning property (known as property income), inheritance, pensions and payments received from public welfare. The three major forms of unearned income based on property ownership are rent, received from the ownership of natural resources; interest, received by virtue of owning financial assets; and profit, received from the ownership of capital equipment.[1] As such, unearned income is often categorized as "passive income".

Unearned income can be discussed from either an economic or accounting perspective, but is more commonly used in economics.

Economics

Unearned income is a term in economics that has different meanings and implications depending on the theoretical framework used. To classical economists, with their emphasis on dynamic competition, income not subject to competition are “rents” or unearned income, such as incomes attributable to monopolization or land ownership. According to certain conceptions of the Labor Theory of Value, it may refer to all income that is not a direct result of labor. In a neoclassical frame, it may mean income not attributed to any factor of production. Generally it may be used to refer to windfall profits, such as when population growth increases the value of a plot of land.

Classical political economists, like Adam Smith and John Locke, viewed land as different from other forms of property, since it was not produced by humans. Land ownership, in the sense of political economy, could refer to ownership over any natural phenomena, including air rights, water rights, drilling rights, or spectrum rights. Classicals like John Stuart Mill were also concerned about monopolies, both natural monopolies and artificial monopolies, and didn't consider their incomes to be entirely earned.

In Marxian economics and related schools, unearned income originates from the surplus value produced by an economy, where "surplus value" refers to value beyond what is needed for subsistence.[2] As such, individuals and groups who subsist on unearned income are characterized as being in an exploitative relationship because the unearned income they receive is not generated by their effort or contribution (hence why their income is "unearned"). The existence of unearned income received on the basis of property ownership forms the basis for the Marxist class analysis of capitalism, where unearned income and exploitation are viewed as inherent to capitalist production.

United States

As defined by the social security administration in the U.S., unearned income is all income that is not earned from your job or from your business. Some common types of unearned income are:[3]

Taxation

Unearned income has often been treated differently for tax purposes than earned income, in order to redistribute income or to recognize its qualitative difference from income derived from productive work. Such a tax structure is often associated with a progressive income tax structure. Supporters argue that extraordinarily high incomes are unearned incomes, with the example of the United Kingdom, where income taxes on the highest brackets reached 98% in 1979.[4] In recent times the pendulum has swung the other way, and most Western countries tax unearned income more favourably than income from productive work for a number of reasons, including an expectation that much of this income ends up being recirculated into the economy, through things like spending or reinvestment.

Capital gains are a form of passive income some argue are unearned, though this is a great point of contention between all the various economic schools of thought. In the United States, capital gains are taxed at the rate of 15%,. Another contentious subject is patents and other forms of exclusive production rights, especially in regards to biology and software.

While classical free market economists were generally skeptical towards unearned incomes, more recent economists, like Ronald Coase, claim that capital markets facilitate allocation of resources to those enterprises which will provide the best economic benefit, and that extra taxes on unearned income can interfere with these mechanisms. Progressives assert that the purpose of taxes themselves is to allocate resources to where they are most needed, and to prevent a system whereby capital is shifted upward at the expense of the lower tax brackets.

See also

References

  1. ↑ O'Hara, Phillip (September 2003). Encyclopedia of Political Economy, Volume 2. Routledge. p. 1135. ISBN 0-415-24187-1. Property income is, by definition, received by virtue of owning property. Rent is received from the ownership of land or natural resources; interest is received by virtue of owning financial assets; and profit is received from the ownership of production capital. Property income is not received in return for any productive activity performed by its recipients.
  2. ↑ Wood, John Cunningham (1996). Karl Marx's Economics: Critical Assessments I and II. Routledge. p. 59. ISBN 978-0415087148. But here again Marx’s theory must be understood in Marx’s terms. He divides output three ways: into wage income (“variable capital”), property income (“surplus value”) and replacement of depreciated machinery and raw materials, etc. (“constant capital”)
  3. ↑ " What is “unearned income”?", U.S. Social Security Handbook (retrieved December 27, 2012)
  4. ↑ http://economics.ouls.ox.ac.uk/12647/1/168_Atkinson.pdf Atkinson, A.B., "Income Tax and Top Incomes over the Twentieth Century", December, 2003, p. 132