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LuckyOne

I Have Seen The Phrase "unearned Income" .....

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I have seen "unearned income" used quite a bit recently when it comes to tax discussions. They way that it is used by some seems to imply that there is something unsavory about having income from sources besides employment.

I think that there are two types of income from sources besides employment :

- Income earned as a return on investments. These investments could be the result of the efforts of a current person during their lifetime (savings), the efforts of a previous generation (inheritance) or good fortune (a gift or a lottery win for example). These assets have already been taxed at least once (either at an individual or societal level) before they generate further income. I am not quite sure why this income deserves to be taxed again. This is the generally accepted use of the term of unearned income.

- Income granted by the state which is a transfer from those who generate income from either employment or investment. This is a semi-democratic transfer that roughly reflects the societal consensus about the level of largesse that the productive element of society should bestow upon the less productive element of society. Some of this is seen as almost universally fair (the profoundly disabled for example) while some of it is subject to much debate (benefit cheats for example) as we will probably see in the next GE. This type of income is not usually described as unearned income but it certainly is.

I wonder where we will end up in the long run if we discourage savings, multi-generational family fiscal discipline and end up with a system where we remove any incentive to save and invest by taxing one unit of income generated from productive effort multiple times.

I accept that some see inheritance as being profoundly unfair. I think that removing the desire to pass on the benefit of savings to future generations reduces the incentive to generate savings now which reduces overall economic output required to provide benefits to the unproductive (etiher by choice or misfortune) parts of our society.

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Apparently it's "Income that is not a wage, such as interest, dividends or realised capital gains from investments, rent from land or property ownership, and any other income that does not derive from work."

Make of that what you will! Government will always want another bite out of something it feels like it's missing out on. Even if they've taxed it once already!

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I'm pretty sure that back when Labout were actually "socialists" they used to have higher tax rates on "unearned income" (from interest on savings, dividends etc) than on income from work.

This was because somehow work was seen as a better way of earning money?

These days given unemployment they ought to be encouraging people to live off "unearned" income - because it leave the jobs available for those who really need them.

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Whne Labour was last in power income such as investments and rents were seen as unearned. A surcharge applied in addition to the tax payable and it was possible to have an effecrive tax rate of over 100%.

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I'm pretty sure that back when Labout were actually "socialists" they used to have higher tax rates on "unearned income" (from interest on savings, dividends etc) than on income from work.

This was because somehow work was seen as a better way of earning money?

These days given unemployment they ought to be encouraging people to live off "unearned" income - because it leave the jobs available for those who really need them.

Great way of thinking about it.

The Permanent Income Hypothesis says that changes in fiscal circumstances will only change behaviour if people believe that changes are permanent. I can't see anyone trusting any government enough to stop working just because they promise a permanent low (or zero) tax rate on investment income.

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I have seen "unearned income" used quite a bit recently when it comes to tax discussions. They way that it is used by some seems to imply that there is something unsavory about having income from sources besides employment.

I think that there are two types of income from sources besides employment :

- Income earned as a return on investments. These investments could be the result of the efforts of a current person during their lifetime (savings), the efforts of a previous generation (inheritance) or good fortune (a gift or a lottery win for example). These assets have already been taxed at least once (either at an individual or societal level) before they generate further income. I am not quite sure why this income deserves to be taxed again. This is the generally accepted use of the term of unearned income.

The government defines these things badly and you aren't doing much better here.

Earned income is income that directly or indirectly comes for the provision of some improvement or betterment to others. (this includes but is not limited to wages)

Unearned income is collected merely as the result of extra cost inflicted upon other people; the payment is not made for a compensating betterment. The biggest example of unearned income is so called 'capital gains' in land.

Edited by Stars

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These days given unemployment they ought to be encouraging people to live off "unearned" income - because it leave the jobs available for those who really need them.

Except that because it is unearned, it increases the costs for people in work..so it doesn't help

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Is it the same as `private income` ?

Certainly they are still regiments of the Brtiish Army who prefer to recruit Officers who have a private income - The Guards Regiments for example ...

Doesn`t having a private income also define you as been upper middle-class ?

Edited by Wires 74

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Fropm an accounting prespective, unearned income means the following:

Imagine a scenario where a customer has paid you up-front for say all of the van servicing they're going to need for the next three years. You might have given them a discount to encourage them to do this.

So you book a block of cash which becomes an asset on your balance sheet. You start to book income (i.e. earned income - this is you recognising portions of that cash as income) as you service the vans. The income which has not yet been earned i.e. that attributed to the vans not yet serviced would appear as a liability on the balance sheet called 'unearned income'

Together the cash you booked, the earned income and the unearned income net off to zero.

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I like to think of it as earned income you do the graft and unearned income your capital does the work , given that capital is more mobile nowadays than people it really make sense to tax the earned income more, ( excluding immovable assets which are a sitting duck to the taxman )

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Yeah it is disgusting to be honest.

It's even worse if it's rent - think about this (although I know the idea of owning a BTL is anathema to many here):-

You pay income tax. With what's left you buy a flat.

You rent it out. Your tenant pays income tax, pays some of what's left to you.

You pay tax on the rent paid to you.

Double taxation sucks, basically.

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Yeah it is disgusting to be honest.

It's even worse if it's rent - think about this (although I know the idea of owning a BTL is anathema to many here):-

You pay income tax. With what's left you buy a flat.

You rent it out. Your tenant pays income tax, pays some of what's left to you.

You pay tax on the rent paid to you.

Double taxation sucks, basically.

Ho humm (cough)

Even worse -

You rent out a flat and both you and your tenant pay some tax. As a result of the effect of his tax payments on local amenity, his rent rises. So you gain from his taxes and he doesn't because he has to pay you for any amenity increase his tax causes.

Now that really is unearned income.

Edited by Stars

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I wonder where we will end up in the long run if we discourage savings, multi-generational family fiscal discipline and end up with a system where we remove any incentive to save and invest by taxing one unit of income generated from productive effort multiple times.

Seems to be a general rule of Keynsian thinking:

To Keynes, excessive saving, i.e. saving beyond planned investment, was a serious problem, encouraging recession or even depression. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline.

Linky

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.......a system where we remove any incentive to save
I don't get this thing about people thinking it's not worth saving money because interest rates are so low. If you save £100 per week, you've saved £5200 in a year, even with no interest, a sum you can do something with. Interest is nice, but it's really just the icing on the cake. Edited by blankster

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Guest sillybear2

It's basically akin to a private tax on productive output, people collecting rents on pre-existing resources that would exist anyway. Say my great-great grandfather stolen a whole bunch of land under the inclosure acts and today I still get to steal the value added and real productive output of my tenant farmers by collecting rents. Or in connivance with a corrupt government I gated off and tolled all the trunk roads and collected tolls on people going about their daily business on what was once a public highway.

http://en.wikipedia.org/wiki/Rentier_capitalism

http://en.wikipedia.org/wiki/Rent-seeking

http://en.wikipedia.org/wiki/Rentier_state

Imagine a state of affairs where you have too many paper claims on output and too few productive workers, eventually the person actually putting in the real effort will see 90% of his output stolen via taxes, usury and rents on land/property in order to feed a parasitic class. Sound eerily familiar?

Real wealth creation and improving the collective standard of living can only occur through the production of goods and the provision of services, or the exploitation of natural resources like oil (though this alone is also rentier state). Pushing around bits of paper or manipulating the means of exchange doesn't add value, it may make some people wealthy, but this is simply because it's a zero-sum game, a banker's bonus results from theft via usury (and theft from the tax payer it seems). Just to illustrate the point, imagine an economy that simply consisted of banks and government departments, neither would have anything to steal from if there was no productive output.

Edited by sillybear2

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I don't get this thing about people thinking it's not worth saving money because interest rates are so low. If you save �100 per week, you've saved �5200 in a year, even with no interest, a sum you can do something with. Interest is nice, but it's really just the icing on the cake.

Low interest rates encourage me to save even more.

At 10% returns, I need £300,000 in capital to have investment returns of £ 30,000 a year. At 1% returns, I need £3,000,000 in capital to generate the same return.

Low rates help borrowers manage their debts but force savers to increase savings to generate equivalent cash returns.

I think that the impact of low rates is part of what is driving the huge increase in savings rates globally. Implicitly people must be thinking that we are going to be in a low rate environment for a long time.

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The government defines these things badly and you aren't doing much better here.

Earned income is income that directly or indirectly comes for the provision of some improvement or betterment to others. (this includes but is not limited to wages)

Unearned income is collected merely as the result of extra cost inflicted upon other people; the payment is not made for a compensating betterment. The biggest example of unearned income is so called 'capital gains' in land.

So by this definition, does earning interest from lending money to governments, businesses and people as well as investing in shares or BTL count as "earned income" as it is providing some improvement or betterment to others (allowing for the inter-temporal shift in consumption, capital to grow businesses and the provision of shelter respectively)?

I can see how holding land without making any improvements is clearly unearned income. Any gains on land beyond its historic share of national wealth should be taxed at very, very high rates.

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Low interest rates encourage me to save even more.

At 10% returns, I need £300,000 in capital to have investment returns of £ 30,000 a year. At 1% returns, I need £3,000,000 in capital to generate the same return.

Low rates help borrowers manage their debts but force savers to increase savings to generate equivalent cash returns.

I think that the impact of low rates is part of what is driving the huge increase in savings rates globally. Implicitly people must be thinking that we are going to be in a low rate environment for a long time.

Aha, so if rates went to zero you'd need to save an infinite amount ;)

Or you could find something else to do with your surplus. Some will even be forced to draw down capital to replace lost savings income.

I'm not sure about this "huge increase in savings rates" (link?), are you sure it's not QE/bailout money entering the system in response to debt default? (edit: or re-building debt-ridden balance sheets in general?)

Edited by huw

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State version - money they want to take from you but can't find any other reason to do so.

Economic version - money that people don't want to voluntarily give to you.

Edited by Injin

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Except that because it is unearned, it increases the costs for people in work..so it doesn't help

without savings

there is no money to invest in capital and plant

which means lower efficiency and wealth for the Country

of course we have governments spending money they dont have and discouraging savings

and unless savings are encouraged we will continue to see the standard of living reduce in this Country

and captal flight will follow

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Guest sillybear2
So by this definition, does earning interest from lending money to governments, businesses and people as well as investing in shares or BTL count as "earned income" as it is providing some improvement or betterment to others (allowing for the inter-temporal shift in consumption, capital to grow businesses and the provision of shelter respectively)?

If your savings came from income derived from your real output then you could argue it's a case of deferred consumption, if your savings resulted from speculative gains then obviously there was no value added. Our system cannot differentiate between the two, you are paid in monopoly money, the government collects taxes in monopoly money yet at the same time the central and private banks can create as much as they like.

If you're collecting interest then it's usury whether you like it or not, you can maybe justify this by arguing that it compensates for opportunity cost and prices risk. However if we take BTL as an example it was pretty obviously that it went beyond providing a service and resulted in the crowding out of genuine FTB'ers, and then acting as an unwanted middle-man. Banks lent fresh credit to landlords and collected the spread, then the landlord collected rent and paid the mortgage interest, hopefully (for them) collecting a spread in the process too, all this is unreal and doesn't add value, it simply steals from the tenant that has to work for a living... I guess the scam is complete if the tenant works for a bank!

Edited by sillybear2

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Aha, so if rates went to zero you'd need to save an infinite amount ;)

Or you could find something else to do with your surplus. Some will even be forced to draw down capital to replace lost savings income.

I'm not sure about this "huge increase in savings rates" (link?), are you sure it's not QE/bailout money entering the system in response to debt default? (edit: or re-building debt-ridden balance sheets in general?)

If rates went to zero, I would probably be a happy chappy as we would probably be in a deflationary environment. My after tax returns on savings would be the deflation rate.

The savings rate in the US has gone from 1% in early 2008 to 5% now. http://www.bea.gov/BRIEFRM/SAVING.HTM

I agree that low rates encourage people to take on more risk as fixed income returns are pitiful. This is the type of behaviour that the ZIRP is designed to encourage. In the long run, I have found that it is better to do the opposite of what monetary and fiscal policy authorities are trying to persuade me to do.

I agree that the savings rate causes some definitional problems. It is the proportion of income not spent. It could be the reduction in net debt or the increase in net savings. In either case, it is income not being allocated to consumption which is a drag on the economy.

Edited by LuckyOne

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without savings

there is no money to invest in capital and plant

which means lower efficiency and wealth for the Country

I don't think money received as payment for plant (machinery) - actual capital - is unearned

However, money recieved in payment for land (something that was already there), is unearned

Edited by Stars

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I think the difference is between income that is earned through the provision of some sort of good or service and income that is earned for a service that would have been available despite the presence of the income collector.

A landlord fits the latter nicely because a large part of their payment is for access to land, which is a non service because what they're providing would be there despite their claims to payment.

Under the right circumstances even the banking system would be deserving of their share of the profits; capital allocation and risk arbitrage are very useful services for a modern complex economy. People are richer in a society with a banking system than those without one in the sense that the availability of credit allows for more opportunities and gives people the chance to take risks. As always though you can too much of a good thing ;)

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