What is capital income? (with photos)

Capital income is generated from wealth itself, as is the case with stock dividends.

Capital income is income that comes from capital, that is, it comes from wealth itself, not from any specific production or direct labor. Examples are stock dividends or any type of capital gain, as well as the income an owner earns from a business he owns but not from the work he does there. The phrase can also be used to mean any income used for capital expenditures, although this sense is not commonly used.

The purchase and sale of properties can generate capital income.

As defined by the United States Internal Revenue Service (IRS), income can be classified as capital gain or loss depending on whether there is a net gain or loss. For example, if land is purchased for $500,000 US dollars (USD) and one year later it is sold for $600,000 USD, the seller has a capital gain of $100,000 USD, which is included in its capital income for that year. . If, on the other hand, the land was sold for $400,000 USD, a capital loss of $100,000 USD would have occurred.

Capital income includes income derived from investments, such as stock dividends.

In the United States, this form of income is actually taxed significantly less than regular income, that is, income that is derived from hourly work or wages. This is believed to help create an incentive for capitalists to invest more heavily. In fact, suggestions are often made to eliminate capital gains taxes altogether, replacing them with a consumption tax. Under a consumption tax, only the purchase of goods and services would be taxed, so people would be taxed on how much they used, not how much wealth they generated.

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Traditionally, the difference between capital income and regular income was expressed as a difference between earned and unearned income. The concept behind this phrase was that capital income, derived simply from the ownership of wealth, was not earned in the strict sense of the word. Work, on the other hand, was considered an income from work. In the 19th century, in particular, there was a strong backlash against unearned income, which gave voice to many anti-capitalist ideologies of the time.

In the United States, historically, unearned income was expected to be taxed at a significantly higher rate than normal or regular income. When the original federal income tax proposal was introduced in the latter part of the 19th century, it included a higher tax on unearned income. In 1913, when the modern income tax was passed, a provision was introduced to tax earned income at a lower rate than capital income, but this was not accepted. Subsequently, such a provision was approved, but it was revoked a year later.

One argument against allowing capital income to proliferate is that it tends to build on itself, leading to an increasing imbalance in the distribution of wealth. Since capital can generate more capital, any initial capital block, such as the inheritance derivative, will create more capital, increasing exponentially over time. On the other hand, earned income, because it is limited by wages and the number of hours a person can work, will increase much more slowly.

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