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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 economicoraccounting perspective, but is more commonly used in economics.
'Unearned income' is a term coined by Henry George to popularize the economic concept of land rent and 'rent' generally.[2] 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.
Ineconomics '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 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.
InMarxian 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.[3] 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.
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:[4]
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.[5] 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,[citation needed] including an expectation that much of this income ends up being recirculated into the economy, through things like spending or reinvestment.[citation needed]
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.[citation needed] In the United States, long term capital gains (generally assets held more than 12 months) are taxed at the rate of 15%.[6] Another contentious subject is patents and other forms of exclusive production rights, especially in regards to biology and software.[citation needed]
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.
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.
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")
