Unearned income

This article is about a property of personal income. For the financial accounting term, see deferred income.

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 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 the they are most needed, and to prevent a system whereby capital is shifted upward at the expense of the lower tax brackets.

See also

• Earned income
• Economic rent
• FIRE economy
• rentier

References