Unearned income
Encyclopedia
Unearned income is a term in economics
that has different meanings and implications depending on the theoretical frame. 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.
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 work. Such a tax structure is often associated with a progressive income tax structure. Supporters argue that extraordinarily high incomes are unearned incomes, so income taxes on the highest brackets reached 98% in the United Kingdom in 1979. In recent times the pendulum has swung the other way, and most Western countries tax unearned income more favourably than income from work. For instance, as a result of Proposition 13 in California, land ownership is taxed at under 1%.
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%, which is far less than income taxes. 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 market
s 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 the they are most needed, and to prevent a system whereby capital is shifted upward at the expense of the lower tax brackets.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
that has different meanings and implications depending on the theoretical frame. To classical economists
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
, with their emphasis on dynamic competition, income not subject to competition are “rents
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....
” or unearned income, such as incomes attributable to monopolization or land ownership. According to certain conceptions of the Labor Theory of Value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...
, 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
Windfall gain
-Types of Windfall Gains:The list of windfall gains includes, but is not limited to:*Lottery winnings*Unexpected inheritance*Gains from demutualization-Uses of Windfall Gains:What people do with windfall gains is subject to much debate...
profits, such as when population growth increases the value of a plot of land.
Classical political economists, like Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
and John Locke
Lockean proviso
The Lockean Proviso is a portion of John Locke's labor theory of property which says that though individuals have a right to acquire private property from nature, that they must leave "enough and as good in common...to others."...
, 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
Air rights
Air rights are a type of development right in real estate, referring to the empty space above a property. Generally speaking, owning or renting land or a building gives one the right to use and develop the air rights....
, water rights, drilling rights, or spectrum rights
Spectrum management
Spectrum management is the process of regulating the use of radio frequencies to promote efficient use and gain a net social benefit.The term radio spectrum typically refers to the full frequency range from 3 kHz to 300 GHz that may be used for wireless communication...
. Classicals like John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...
were also concerned about monopolies, both natural monopolies and artificial monopolies, and didn't consider their incomes to be entirely earned.
Unearned income has often been treated differently for tax purposes than earned income, in order to redistribute
Redistribution (economics)
Redistribution of wealth is the transfer of income, wealth or property from some individuals to others caused by a social mechanism such as taxation, monetary policies, welfare, nationalization, charity, divorce or tort law. Most often it refers to progressive redistribution, from the rich to the...
income or to recognize its qualitative difference from income derived from work. Such a tax structure is often associated with a progressive income tax structure. Supporters argue that extraordinarily high incomes are unearned incomes, so income taxes on the highest brackets reached 98% in the United Kingdom in 1979. In recent times the pendulum has swung the other way, and most Western countries tax unearned income more favourably than income from work. For instance, as a result of Proposition 13 in California, land ownership is taxed at under 1%.
Capital gains are a form of passive income
Passive income
Passive income is an income received on a regular basis, with little effort required to maintain it.The American Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio 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%, which is far less than income taxes. 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
Ronald Coase
Ronald Harry Coase is a British-born, American-based economist and the Clifton R. Musser Professor Emeritus of Economics at the University of Chicago Law School. After studying with the University of London External Programme in 1927–29, Coase entered the London School of Economics, where he took...
, claim that capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
s 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 the they are most needed, and to prevent a system whereby capital is shifted upward at the expense of the lower tax brackets.