Unearned income

Unearned income is a term coined by Henry George to refer to income gained through ownership of land and other monopoly. Today the term often 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 coined by Henry George to popularize the economic concept of land rent and 'rent' generally.[2] 'Rent', from "to rend", literally refers to income that has been "ripped off" or "torn away" from other people.[3][4][5] George modified John Stuart Mill's term 'unearned increment of land' to broaden the concept to include all land rent, not just increases in land price.

In economics 'unearned income' 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, mainly income from land titles, are 'rents' or unearned income. According to certain conceptions of the Labor Theory of Value, it may refer to all income that is not an immediate result of labor. In a neoclassical frame, it may mean income not attributed to the normal or expected returns to a 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.[6] 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 American Social Security Administration, unearned income is all income that is not earned from one's job or from one's business. Some common types of unearned income are:[7]

  • The value of food or shelter received from someone, or the amount of money received to help pay for them;
  • Department of Veterans Affairs (VA) benefits;
  • Railroad retirement and railroad unemployment benefits;
  • Annuities, pensions from any government or private source, workers' compensation, unemployment insurance benefits, black lung benefits and Social Security benefits;
  • Prizes, lottery winnings, settlements and awards, including court-ordered awards;
  • Proceeds of life insurance policies;
  • Gifts and contributions;
  • Support and alimony payments;
  • Inheritances in cash or property;
  • Rental income;
  • Dividends and interest; and
  • Strike pay and other benefits from unions.

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.[8] 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, long term capital gains (generally assets held more than 12 months) are taxed at the rate of 15%, [9]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. ^ Schweikart, Larry (2007). A patriot's history of the United States : from Columbus's Great Discovery to the war on terror. New York, N.Y: Sentinel. ISBN 1595230327.
  3. ^ Bosworth, Joseph (2012). Dictionary of the anglo-saxon language. Place of publication not identified: Nabu Press. ISBN 1248741447.
  4. ^ Bomhard, Allan (1994). The Nostratic macrofamily : a study in distant linguistic relationship. Berlin New York: Mouton de Gruyter. ISBN 3110139006.
  5. ^ Webster, Noah, and Noah PORTER. Webster's Revised Unabridged Dictionary of the English Language. Edited under the Supervision of Noah Porter ... To Which Is Now Added a Department of New Words, Etc. Pp. Lxx. 2026. G. & C. Merriam Co.: Springfield, Mass., 1913. Print.
  6. ^ 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”)
  7. ^ " What is “unearned income”?", U.S. Social Security Handbook (retrieved December 27, 2012)
  8. ^ 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
  9. ^ "2016 Federal Tax Rate" (PDF). RSM US LLP. Retrieved 4 September 2016.
2011 Australian federal budget

The 2011 Australian federal budget for the Australian financial year ended 30 June 2012 was presented on 10 May 2011 by the Treasurer of Australia, Wayne Swan, the fourth federal budget presented by Swan, and the first budget of the Gillard Government. The budget forecast a $22.6 billion deficit and delivered a $44.4 billion deficit.

Capital gain

A capital gain refers to profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price. Conversely, a capital loss arises if the proceeds from the sale of a capital asset are less than the purchase price.

Capital gains may also refer to a different form of profit received from an asset that refers to "investment income" in the form of cash flow or passive income that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets.

Deferred income

Deferred income (also known as deferred revenue, unearned revenue, or unearned income) is, in accrual accounting, money received for goods or services which have not yet been delivered. According to the revenue recognition principle, it is recorded as a liability until delivery is made, at which time it is converted into revenue.For example, a company receives an annual software license fee paid out by a customer upfront on January 1. However, the company's fiscal year ends on May 31. So, the company using accrual accounting adds only five months' worth (5/12) of the fee to its revenues in profit and loss for the fiscal year the fee was received. The rest is added to deferred income (liability) on the balance sheet for that year.

A typical example is an annual maintenance contract where the entire contract is invoiced up front. “I received $12,000 for an annual maintenance contract, but need to recognize it as deferred income, and then recognize $1,000 each month as the service is rendered.”

Deferred income shares characteristics with accrued expense, with the difference that a liability to be covered later are goods or services received from a counterpart, while cash is to be paid out in a latter period, when such expense is incurred, the related expense item is recognized, and the same amount is deducted from accrued expenses. To put this more clearly, deferred income – the money that a company receives in advance – indicates the goods and services the company owes to its customers, while accrued expense indicates the money a company owes to others.

Exploitation of labour

Exploitation of labour (or labor) is the act of treating one's workers unfairly for one's own benefit. It is a social relationship based on an asymmetry in a power relationship between workers and their employers. When speaking about exploitation, there is a direct affiliation with consumption in social theory and traditionally this would label exploitation as unfairly taking advantage of another person because of his or her inferior position, giving the exploiter the power.

Karl Marx, who is considered the most classical and influential theorist of exploitation, did not share the same traditional account of exploitation. Marx's theory explicitly rejects the moral framing characteristic of the notion of exploitation and restricts the concept to the field of labour relations. In analyzing exploitation, many political economists are often stuck between the explanation of the exploitation of labour given by Marx and Adam Smith.

Federal Insurance Contributions Act tax

The Federal Insurance Contributions Act (FICA ) is a United States federal payroll (or employment) contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

Geoffrey Stevens (British politician)

Geoffrey Paul Stevens (10 November 1902 – 10 May 1981) was an English chartered accountant and politician who was noted for his support for reductions in taxation.

It Can't Be!

«It Can't Be!» (Russian: Не может быть!, romanized: Ne mozhet byt!) is a 1975 Soviet comedy film directed by Leonid Gaidai. It consists of three short stories, shot on the works of Mikhail Zoshchenko comedy «Crime and Punishment», «Fun Adventure» and «Wedding event».

Keep the Aspidistra Flying

Keep the Aspidistra Flying, first published in 1936, is a socially critical novel by George Orwell. It is set in 1930s London. The main theme is Gordon Comstock's romantic ambition to defy worship of the money-god and status, and the dismal life that results.

Kiddie tax

The kiddie tax rule exists in the United States of America and can be found in Internal Revenue Code § 1(g), which "taxes certain unearned income of a child at the parent's marginal rate, no matter whether the child can be claimed as a dependent on the parent's return".

LSU School of Music

Louisiana State University School of Music (LSU, commonly referred to as LSU School of Music) is a music school located on the northwestern side of the campus of Louisiana State University in Baton Rouge, Louisiana, United States. The school is part of LSU's College of Music & Dramatic Arts, which also includes the LSU School of Theater. The college includes over 100 faculty and staff, over 600 majors, and offers wide range of degrees and curricular concentrations.

Means of production

In economics and sociology, the means of production (also called capital goods) are physical and non-financial inputs used in the production of economic value. These include raw materials, facilities, machinery and tools used in the production of goods and services. In the terminology of classical economics, the means of production are the "factors of production" minus financial and human capital.

The social means of production are capital goods and assets that require organized collective labor effort, as opposed to individual effort, to operate on. The ownership and organization of the social means of production is a key factor in categorizing and defining different types of economic systems.

The means of production includes two broad categories of objects: instruments of labor (tools, factories, infrastructure, etc.) and subjects of labor (natural resources and raw materials). People operate on the subjects of labor using the instruments of labor to create a product; or stated another way, labor acting on the means of production creates a good. In an agrarian society the principal means of production is the soil and the shovel. In an industrial society the means of production become social means of production and include factories and mines. In a knowledge economy, computers and networks are means of production. In a broad sense, the "means of production" also includes the "means of distribution" such as stores, the internet and railroads (Infrastructural capital).

Monetary reform in the Soviet Union, 1991

Monetary reform of 1991 (known also as Pavlov Reform) was the last of such in the Soviet Union. The reform had a confiscatory character. It began on January 22, 1991. Its architect was Minister of Finance Valentin Pavlov, who was to become the last prime minister of the Soviet Union.

Passive income

Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.

The U.S. Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio income. It defines passive income as only coming from two sources: rental activity or "trade or business activities in which you do not materially participate." Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing. Passive income is usually taxable.

Property income

Property income refers to profit or income received by virtue of owning property. The three forms of property income 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. As such, property income is a subset of unearned income and is often classified as passive income.

Tax Increase Prevention and Reconciliation Act of 2005

The Tax Increase Prevention and Reconciliation Act of 2005 (or TIPRA, Pub.L. 109–222, 120 Stat. 345) is an American law, which was enacted on May 17, 2006.

This bill prevents several tax provisions from sunsetting in the near future. The two most notable pieces of the bill are the extension of the reduced tax rates on capital gains and dividends and extension of the alternative minimum tax (AMT) tax reduction.

Tax shift

Tax shift or Tax swap is a change in taxation that eliminates or reduces one or several taxes and establishes or increases others while keeping the overall revenue the same. The term can refer to desired shifts, such as towards Pigovian taxes (typically sin taxes and ecotaxes) as well as (perceived or real) undesired shifts, such as a shift from multi-state corporations to small businesses and families.

To each according to his contribution

"To each according to his contribution" is a principle of distribution considered to be one of the defining features of socialism. It refers to an arrangement whereby individual compensation is reflective of one's contribution to the social product (total output of the economy) in terms of effort, labor and productivity. This is held in contrast to the method of distribution and compensation in capitalism, where those who own private property receive unearned income in the form of interest, rent, or profit by virtue of ownership irrespective of their contribution to the social product.This concept also formed the basic definition of socialism for its pre-Marxist proponents, including Ricardian socialists, classical economists, and individualist anarchists.

Unearned increment

Unearned increment is an increase in the value of land or any property without expenditure of any kind on the part of the proprietor; it is an early statement of the notion of unearned income. It was coined by John Stuart Mill, who proposed taxing it so that it benefits every member of a society . Mill's concept was refined and developed by nineteenth-century economist Henry George in his book Progress and Poverty (1879).

Uniform Gifts to Minors Act

The Uniform Gifts to Minors Act (UGMA) is an act in some states of the United States that allows assets such as securities, where the donor has given up all possession and control, to be held in the custodian's name for the benefit of the minor without an attorney needing to set up a special trust fund. This allows a minor in the United States to have property set aside for the minor's benefit and may achieve some income tax benefit for the child's parents. Once the child reaches the age of maturity (18 or 21 depending on the state), the assets become the property of the child and the child can use them for any purpose. Contributing money to an UGMA account on another person's behalf could be subject to gift tax; however, the Internal Revenue Code of the United States allows persons to give up to the annual gift tax exclusion to another person without any gift tax consequences, and gifts exceeding that amount as long as total gifts are below the lifetime limits.

In the majority of states that have adopted the Uniform Transfers to Minors Act (UTMA), the assets are treated similarly. The assets are held in the custodian's name until the child reaches age of maturity. States that adopted UTMA also repealed UGMA; UTMA specifically provides that contracts in UTMA states which reference UGMA are governed by UTMA. Thus, UGMA is often still referred to in contracts designed for use in multiple states, even though it may actually mean UTMA in a particular state. Under the UGMA or UTMA, the ownership of the funds works like it does with any other trust and the donor must appoint a custodian (the trustee) to look after the account for the benefit of the beneficiary.

Until 1986, a UGMA or UTMA account allowed the assets to be taxed at the minor's income tax bracket. Tax law changes in 1986, 2006, 2007 and 2017 known as the "kiddie tax" have substantially reduced the tax savings of UGMAs and UTMAs. Until 2018, for beneficiaries under 19 (under 24 if a student), the first $1,000 of unearned income was tax-free, the second $1,000 was taxed at the minor's rate (typically 15%), and the amount over $2,000 was taxed at the parent's rate. The current rule is that for beneficiaries under 19 (under 24 if a student), the first $1,050 of unearned income is tax-free, the second $1,050 is taxed at the minor's rate (typically 12%), and the amount over $2,100 is taxed at the ordinary and capital gains rates applicable to trusts and estates. Minors can also invest in the stock market.One negative effect of UGMA or UTMA assets for minors who plan to attend college is that financial aid is typically reduced by 20-25% of the UGMA or UTMA balance. Some financial advisers therefore advise depleting the balance in these accounts, always for purposes benefiting the minor such as summer camp, books, computer and similar expenses, well before the minor begins the process of applying to college.

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